Liquidity is tight now in mainland China, due to the recent crackdown on profligate lending and graft. All eyes have turned to lending for the quick gain, not the long game. Connections are all that matters.
The intricate network that branched out from China Huarong Asset Management, one of the country’s state-owned bad debt managers, is a classic case.
Huarong International then lent the money in different forms – term loan, equity investment with put option, and convertible bonds.
Within a year, its lending and investment ballooned 10 times to HK$13.8 billion, resulting in a 410% rise in profit to HK$525 million, according to its 2016 report.
What other business could have made such stellar performance within such a short period of time? Of course, the game didn’t stop here.
For comparison, mainland developers with much stronger asset backing are paying between 6 to 8 per cent interest.
HKBridge lent out the money within weeks, saying it’s reinventing itself into an investment bank with money raised from new shareholders and loans. Sounds like a clone of Huarong International?
It is more a loan than investment because HKBridge has a put option to sell the shares back to Hung within 90 or 180 days. The put price will translate into a return of between 18.4 per cent and 36.9 per cent. By late May, HKBridge had lent 200 million yuan to a Zhuhai developer at 18 per cent.
This is a gravy train that fed three listed companies.
Huarong gets 4 per cent interest from lending to Huarong International, which earns a 3.5 per cent spread while HKBridge gets 11 per cent.
This gravy train isn’t for just anybody though; two of HKBridge’s key figures are connected to Huarong.
The two companies also jointly invested HK$1.4 billion in two limited partnership funds, the usual euphemism for a lending platform.
Huarong isn’t the only company riding on China’s demand for loans. China Minsheng Financial Holdings, a unit of the country’s first non-state bank, also loaned out almost HK$2 billion last year, according to its annual report.
The only difference is the interest rate. With its funding cost much higher than state-owned entities, Minsheng is charging interest at up to 10 to 30 per cent.
Demand for loans is unlikely to go down in the near term. In the name of financial security, mainland regulators have imposed the most draconian crackdown on financing, hurting the cash flow of many borrowers in the process.
The bank watchdog is trimming down loans by ordering those dressed up as investment products to be listed back on their balance sheets. Its fellow regulator in insurance has banned the sale of investment schemes packaged as insurance policies. Meanwhile, the securities regulator issued a guideline that’s made stock sales by major shareholders close to impossible.
How about the risk? Huarong’s loan-to-equity ratio has increased from 530 per cent to 1,340 per cent between 2015 and 2016.
Five borrowers have borrowed HK$3.1 billion, accounting for 63 per cent of its total assets.
The company pointed to its vigilant risk management as well as its holdings in listed companies and land as collateral.
After all, much of its cash came from its parent. No sweat.