Should Hong Kong brave something Beijing won’t dare?
Shandong International Trust is seeking a Hong Kong listing with a shadow banking business no less murky and risky than a casino junket
Shadow banking is synonymous with risk. For 22 years, mainland regulators forbade these companies from a stock market listing. Now, it is knocking on the door of Hong Kong.
State-owned Shandong International Trust (SIT) is applying for a public offering which will soon be vetted by the Listing Committee.
Ranked 20th in the industry by assets under management, this provincial firm is a nobody.
The significance of its listing, if any, is in opening the door to the dozen big guys which are all facing strong recapitalising needs and scrambling for a listing.
In the past decade, three of them have tried to complete a back door listing on the A-share market. All were rejected. Six are attempting a back-door listing this year. Not one has been approved so far.
At the same time, a proposed regulation on the listing of trust firms by Beijing was shelved within months of its tabling.
Mainland regulators do have good reason to hesitate, judging from the issues revealed by SIT’s draft prospectus.
The problem is largely summed up by a rare, if not unprecedented, line in its chapter on risk factors: “An investment in our shares involves a high degree of risk.”
Let us look closer into its trust business. (It has many other businesses.)
Unless one reads the fine print, an investor with no knowledge of mainland shadow banking will hardly gasp the risk from SIT’s 500-page listing document.
Instead, he or she would see a low-risk entity earning fees by hooking up lenders with cash-strapped property developers who have had no luck with the banks.
The so-called trusts are a pseudonym for loans in which the middle-man takes no risk, or at least that’s how the relationship is portrayed.
“We are not responsible to our trust clients or the beneficiaries for any loss of trust asset, except for loss caused by our failure to properly fulfil our duty as a trustee,” it said.
Two paragraphs, however, tell a different story.
They said the company has “consolidated” trust schemes with 15 billion yuan of assets under management on its balance sheet since 2013. Translation: the middleman has become the financier of 15 billion yuan in loans.
These are loans of questionable quality.
For instance, SIT has to classify as impaired a quarter of the 3.9 billion yuan and 4.3 billion yuan in loans it has taken over in 2015 and the first five months of 2016.
A write-down was also necessary for loans taken over in 2013 and 2014, though of a smaller percentage.
Some of the trusted “consolidated” loans were backed by equities which devalued significantly in last year’s stock market crash, burning another hole in SIT’s profit which has also been deteriorating due to increasing competition. SIT earned 1 billion yuan last year. In the first five months of this year it earned 282 million yuan.
Why take over the loans?
SIT offered no explanation or details, noting that it’s the result of “substantial subjective judgement” of factors including rights held by itself and other parties.
Behind these ambiguous words is the prime reason why mainland regulators dared not to list trust companies: They are black boxes.
Sixty per cent of the loans managed by SIT are “individual trusts” which is “tailor-made” for one borrower with money from one financier.
To and by who? What are the terms? Each is different. The trust cannot explain. Neither can an investor gauge the risk.
In a way, this is an operation that is no less opaque than that of junkets bringing gamblers to Macau to bet with money pooled from financiers.
If the regulators found junkets unfit for listing here, it is hard to see how the trust companies can get their way.
There is a big difference between the two though. The latter are largely state-owned and they are desperate for capital.
It is not an easy choice for our regulators. History may offer some advice if our regulators are eager to help.
In 2009, the Listing Committee approved the listing of Russian aluminium giant Rusal. The Securities and Futures Commission, however, found it too risky given its financial complexity and sovereign concerns.
The commission barred the giant from selling shares to retail investors and made the board lot large enough to be unattractive to retailers.
Are our watchdogs going to replay the Rusal scheme or give a green light without any strings attached? Or will they say no? The outcome will be very telling of the state of our regulatory regime.