Banking & Finance

Guaranteed woe

Shandong firms tangled in a web of debt


Xi Jinping has warned that financial stability is essential to China’s national security, so bank runs aren’t good news for the promotion prospects of the officials in the Shandong city that has seen one.

Not that a disgruntled worker cared much about that when he posted a message on WeChat trashing his employer’s financial health.

“Sanwei Group in Linyi city is bankrupt. Its major creditor Linshang Bank is also finished,” he wrote, having become upset that he’d been placed on unpaid leave because of a production halt at Sanwei, an agricultural processing firm.

The post sparked a panic in Shandong, an eastern province where Linshang Bank is based, and hundreds of depositors rushed to branches in Linyi to withdraw cash (despite the fact that China rolled out a deposit insurance scheme in 2015 that covers deposits up to Rmb500,000, or roughly $75,000).

Regulators were dismayed and police cracked down swiftly on the internet users spreading the rumours, arresting five and reprimanding eight others.

Linshang Bank says on its website that it had deposits of Rmb61 billion at the end of 2016 and its loan book stood at Rmb46 billion. But this month’s bank run underlines the fragile confidence in smaller regional lenders. And as the Chinese media pointed out, it also reflects the gloomy sentiment hanging over much of Shandong’s financial market.

Take Zouping, the erstwhile star town of Shandong and one of the richest Chinese counties. Also known as China’s “aluminium valley”, Zouping is home to a number of major smelters such as China Hongqiao, the country’s largest aluminium producer in terms of installed capacity, and Qixing Group, whose name means “Star of Shandong”.

But the stars have been falling in Zouping, with some of its biggest private sector firms hamstrung by cash shortages. Hongqiao is a target of foreign short-selling research firms (see WiC358) amid questions about its financial health. Similarly, a Shandong court declared Qixing bankrupt earlier this month and creditors will now try to restructure the mining-to-property conglomerate’s debts.

According to CBN, a newspaper, Qixing’s close ties with the Zouping local government gave it access to easy credit to expand its aluminium capacity over recent years. The company has also ventured into property development and power cable manufacturing. However, most of Qixing’s businesses have turned sour. Its debt woes were made public in March when it defaulted on more than Rmb7 billion of borrowing from financial institutions and private lenders. Worse still, this triggered a chain reaction as investors dumped the bonds issued by other companies in Zouping, where private sector firms had cross-guaranteed each other’s debts (a risky practice also common among Zhejiang companies, see WiC157).

Take Xiwang Group, a former sugar producer which has diversified into real estate development. The Zouping-based company had provided Rmb3 billion in guarantees to Qixing. As a result, Xinhua reports that Xiwang initially tried to take over the management of Qixing under the direct instructions of the Zouping local government. However, Xiwang was forced to give up the bailout plan last month as investors questioned its own financial strength and dumped the shares of its Hong Kong-listed units.

For the time being there is little detail on whether Qixing’s debt restructuring could prompt financial stress at neighbouring firms, although CBN is reporting that banks have set up a “creditors’ committee” to ensure “financial stability” during the untangling of its complex web of liabilities.

In the short term China Hongqiao seems to have been able to stop the rot, as the smelter announced this week it will get a $1 billion lifeline from Citic Group to repay bank loans (Hongqiao’s net debt stood at Rmb62 billion at the end of last year, or 137% of its net equity).

In return, Citic will receive new shares and convertible notes in Hongqiao. The bailout plan means that Citic – the state-owned financial conglomerate – could end up owning more than 13% of the world’s biggest smelter.

That positive news aside, whether financial conditions will continue to deteriorate in Zouping remains to be seen.

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