Shocking (although not unexpected) article in The Malay Mail by Reuters: "China auditor uncovers 200b yuan in fake revenue at state firms", some snippets:
China’s government auditor said in its 2016 report published today that 18 of 20 central state firms it audited had inflated revenue by 200 billion yuan (RM125.4 billion) and profits by 20.3 billion yuan in recent years.
The companies audited include China National Petroleum Corporation, China Huaneng Group and Sinochem Group.
The report from the National Audit Office also said that due to inadequate risk control measures, the 20 centrally-administered firms had put overseas investments worth 38.5 billion yuan at risk.
Implications for China listed companies in Malaysia are bad, I expect things to be worse from an accounting point of view. Several of those companies are finally showing their true colours.
Will there be even a sliver of justice by the authorities coming down on the real culprits, and will the Chinese authorities lend a helping hand? I strongly doubt it.
With hindsight we are all experts. But the sad part is that many warnings were out there, already a long time ago. One of my first blog postings from 2011 (!) can be found here: China companies listed on BM.
"Where is Ze Moola" had written a lot about the same issue long before that.
Malaysian investors who poured hundreds of millions of RM in the IPOs of these companies have been hugely disadvantaged. Was this really necessary, should the authorities have listened more to the critical voices?
Showing posts with label China. Show all posts
Showing posts with label China. Show all posts
Sunday, 25 June 2017
Friday, 27 May 2016
Alibaba investigated over accounting practices (2)
In addition to yesterdays posting about Alibaba, I like to point to a posting on "China Accounting Blog" (which is anyhow always a good source of information for all accounting matters related to China): "BABA v the SEC".
There are three issues at hand, all described by Paul Gillis:
The first relates to consolidation policies and practices (including accounting for Cainiao Network as an equity method investee).
The second issue is related party transactions. BABA certainly has plenty of them and they have been a major concern for shareholders, especially since Alipay was taken out of the BABA structure.
The third issue relates to the reporting of operating data from singles day (November 11, the biggest online commerce day of the year in China).
Regarding the third issue I also refer to an old posting.
There are three issues at hand, all described by Paul Gillis:
The first relates to consolidation policies and practices (including accounting for Cainiao Network as an equity method investee).
The second issue is related party transactions. BABA certainly has plenty of them and they have been a major concern for shareholders, especially since Alipay was taken out of the BABA structure.
The third issue relates to the reporting of operating data from singles day (November 11, the biggest online commerce day of the year in China).
Regarding the third issue I also refer to an old posting.
Wednesday, 11 May 2016
Unfair delistings
I often complained about minority shareholders in Malaysia being treated badly: relatively high IPO prices, low delisting prices, and in quite a few cases a high IPO price again at relisting.
I call it the "listing-delisting-relisting game", and some local tycoons are very good in playing it.
The main problem is the low delisting price, major shareholders wait until the price has dropped considerably, and then, under the threat of minority shareholders owning shares in an unlisted company, offer a low exit price.
In other countries things are not much better though, so it seems.
Article from Bloomberg:
"In $39 Billion China Buyout Spree, Latest Offer Angers Investors"
Some snippets (emphasis mine):
When Leo Ou Chen took his Chinese online beauty products retailer public in the U.S., investors clamored to pay $22 a share. Less than two years later, he’s offering a third of that price to buy them back.
The going-private offer for Jumei International Holding Ltd., the latest in a string of Chinese companies seeking to exit the U.S. stock market, is angering minority shareholders who say the low price benefits management to the detriment of equity owners. Chen and his partners have made a non-binding offer of $7 per American depositary share in cash, the company said on Feb. 17. They own 54 percent of the shares and have 90 percent of the voting power.
If the management-led buyout group is able to buy Jumei at such a steep discount, it will expose loopholes in the rules that are supposed to protect small investors and at the same time undermine confidence in other overseas-listed mainland companies, the minority shareholders say.
“I am angry, disappointed and disgusted,” said Ricky Zhong, an investment director at iMeigu Fund in Beijing. His firm specializes in investing in U.S.-traded Chinese companies and owns Jumei shares. “I’ve never seen so much backlash from investors for a go-private deal. Investors are hurt.”
While the offer from Chen, his co-Founder Yusen Dai and Sequoia funds is 27 percent above the average closing price over the previous 10 trading days, it is 68 percent below its initial public offering price of $22, which was above the high-end of the targeted range. Compared with its average trading during the past 90 days, the proposal is 11 percent cheaper, the second-lowest among 42 proposed going-private deals of U.S.-listed Chinese companies since January 2015, according to data compiled by Bloomberg. Only E-Commerce China Dangdang Inc. has a bigger discount of 16 percent.
Jumei held $402 million in cash or equivalent as of September, according to the latest filing. That is almost equivalent to the $467 million needed for the buyout group to acquire the remaining outstanding shares, according to data compiled by Bloomberg.
While minority shareholders are treated unfairly, they have very little influence in the going-private process, iMeigu’s Zhong said. Under the current law governing companies incorporated in the Cayman Islands, management-led buyout groups are allowed to vote on the deals. Management tends to hold controlling stakes, putting minority shareholders at disadvantage, Zhong said.
“Some people are greedy,” he said. “But it’s the flaws in the regulations that set the ugly side of human desire lose.”
Time to correct the flaws, it is long overdue.
I call it the "listing-delisting-relisting game", and some local tycoons are very good in playing it.
The main problem is the low delisting price, major shareholders wait until the price has dropped considerably, and then, under the threat of minority shareholders owning shares in an unlisted company, offer a low exit price.
In other countries things are not much better though, so it seems.
Article from Bloomberg:
"In $39 Billion China Buyout Spree, Latest Offer Angers Investors"
Some snippets (emphasis mine):
When Leo Ou Chen took his Chinese online beauty products retailer public in the U.S., investors clamored to pay $22 a share. Less than two years later, he’s offering a third of that price to buy them back.
The going-private offer for Jumei International Holding Ltd., the latest in a string of Chinese companies seeking to exit the U.S. stock market, is angering minority shareholders who say the low price benefits management to the detriment of equity owners. Chen and his partners have made a non-binding offer of $7 per American depositary share in cash, the company said on Feb. 17. They own 54 percent of the shares and have 90 percent of the voting power.
If the management-led buyout group is able to buy Jumei at such a steep discount, it will expose loopholes in the rules that are supposed to protect small investors and at the same time undermine confidence in other overseas-listed mainland companies, the minority shareholders say.
“I am angry, disappointed and disgusted,” said Ricky Zhong, an investment director at iMeigu Fund in Beijing. His firm specializes in investing in U.S.-traded Chinese companies and owns Jumei shares. “I’ve never seen so much backlash from investors for a go-private deal. Investors are hurt.”
While the offer from Chen, his co-Founder Yusen Dai and Sequoia funds is 27 percent above the average closing price over the previous 10 trading days, it is 68 percent below its initial public offering price of $22, which was above the high-end of the targeted range. Compared with its average trading during the past 90 days, the proposal is 11 percent cheaper, the second-lowest among 42 proposed going-private deals of U.S.-listed Chinese companies since January 2015, according to data compiled by Bloomberg. Only E-Commerce China Dangdang Inc. has a bigger discount of 16 percent.
Jumei held $402 million in cash or equivalent as of September, according to the latest filing. That is almost equivalent to the $467 million needed for the buyout group to acquire the remaining outstanding shares, according to data compiled by Bloomberg.
While minority shareholders are treated unfairly, they have very little influence in the going-private process, iMeigu’s Zhong said. Under the current law governing companies incorporated in the Cayman Islands, management-led buyout groups are allowed to vote on the deals. Management tends to hold controlling stakes, putting minority shareholders at disadvantage, Zhong said.
“Some people are greedy,” he said. “But it’s the flaws in the regulations that set the ugly side of human desire lose.”
Time to correct the flaws, it is long overdue.
Friday, 12 February 2016
China’s $34 Trillion Experiment Is Exploding
Scary story by Kyle Bass on China's economic and financial problems. Some snippets:
".... China’s liquid reserve position is already below a critical level of minimum reserve adequacy. In other words, China is CURRENTLY out of the required level of reserves needed to safely operate its financial system. The view that China has years of reserves to burn through is misinformed. China’s back is completely up against the wall today, which is one of the primary reasons why the government is hypersensitive to any comments regarding its reserve levels or a hard landing. China’s public reaction in its state media to George Soros’ comments in Davos was in character for a country that is on the precipice of a large devaluation. What is extraordinary is the disconnect between the global discussion on China and the reality on the ground. As economic growth has slowed dramatically, bank credit growth accelerated sharply, leaving the banking system vulnerable to large losses.
Remember, Bernanke had the subprime crisis wrong when he said it was “contained,” Lagarde and Sarkozy had it completely wrong when they said speculators were the cause of Greece’s problems, and now they all have it wrong when they say China’s problems are due to a simple “communication problem” regarding its FX policy. The problems China faces have no precedent. They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances. Risk assets will not be the place to be while all of this is happening.
Once we drew this conclusion in the middle of last year, we decided to liquidate the majority of our risk assets and position ourselves for the various events that are likely to transpire along this long road to a Chinese credit and currency reset. The next 18 months will be fraught with false-starts, risk rallies, and second-guessing. Until China experiences a significant devaluation, it will not be able to cope with the build-up of credit that has helped fuel its rise, but may, in the short-term, be its undoing.
".... China’s liquid reserve position is already below a critical level of minimum reserve adequacy. In other words, China is CURRENTLY out of the required level of reserves needed to safely operate its financial system. The view that China has years of reserves to burn through is misinformed. China’s back is completely up against the wall today, which is one of the primary reasons why the government is hypersensitive to any comments regarding its reserve levels or a hard landing. China’s public reaction in its state media to George Soros’ comments in Davos was in character for a country that is on the precipice of a large devaluation. What is extraordinary is the disconnect between the global discussion on China and the reality on the ground. As economic growth has slowed dramatically, bank credit growth accelerated sharply, leaving the banking system vulnerable to large losses.
Remember, Bernanke had the subprime crisis wrong when he said it was “contained,” Lagarde and Sarkozy had it completely wrong when they said speculators were the cause of Greece’s problems, and now they all have it wrong when they say China’s problems are due to a simple “communication problem” regarding its FX policy. The problems China faces have no precedent. They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances. Risk assets will not be the place to be while all of this is happening.
Once we drew this conclusion in the middle of last year, we decided to liquidate the majority of our risk assets and position ourselves for the various events that are likely to transpire along this long road to a Chinese credit and currency reset. The next 18 months will be fraught with false-starts, risk rallies, and second-guessing. Until China experiences a significant devaluation, it will not be able to cope with the build-up of credit that has helped fuel its rise, but may, in the short-term, be its undoing.
Thursday, 22 October 2015
Short sellers active again (2)
The ink was not yet dry of my previous posting while Glaucus Research posted their short seller report about Real Nutriceutical Group Limited (HK: 2010).
The share is down about 9% at the moment.
Many of the allegations in the report touch on similar concerns related to many of the China listed companies on Bursa.
The share is down about 9% at the moment.
Many of the allegations in the report touch on similar concerns related to many of the China listed companies on Bursa.
Thursday, 9 July 2015
China changing the rules of the game
One thing I hate very much: changing the rule during the game. And that is exactly what seems to be going on in China, where the regulator banned investors holding more than 5 percent to sell shares for the next six months.
Will these extreme measures help? I doubt it. It will probably create artificial side effects, like a fund manager holding more than 5 percent in one holding and less than 5 percent in another. If there are redemptions in the fund then the manager has to sell. He would like to sell a bit of both holdings, but due to the new rules he cant sell the first holding, so has to sell much more in the one he has a smaller holding.
Companies will perform badly in the short term if most of their holding is held by shareholders who own less than 5 percent. All rather strange, to say the least.
From Bloomberg:
"China’s Stock Sale Ban Draws Scorns From Templeton, Wells Fargo"
Templeton Emerging Markets Group calls it an act of “desperation.” UBS Wealth Management labels it “extreme.” And Wells Fargo Funds Management says it just “postpones the inevitable.”
China’s decision to ban major stockholders from selling stakes in listed companies has drawn skepticism from foreign investors. The money managers, with combined assets of almost $4 trillion, say the latest step to stem the country’s equity rout is just another measure to meddle in the market and won’t be enough to restore investors’ confidence.
“It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone. “It actually creates more fear because it shows that they’ve lost control.”
The China Securities Regulatory Commission said Wednesday that investors with holdings exceeding 5 percent as well as corporate executives and directors are prohibited from selling stakes for six months. The rule is intended to stabilize capital markets amid an “unreasonable plunge” in share prices, it said.
While China has already ordered government-owned institutions to maintain or increase stock holdings, the CSRC directive expands the sales ban to non-state companies and potentially foreign investors who own major stakes in mainland businesses.
Will these extreme measures help? I doubt it. It will probably create artificial side effects, like a fund manager holding more than 5 percent in one holding and less than 5 percent in another. If there are redemptions in the fund then the manager has to sell. He would like to sell a bit of both holdings, but due to the new rules he cant sell the first holding, so has to sell much more in the one he has a smaller holding.
Companies will perform badly in the short term if most of their holding is held by shareholders who own less than 5 percent. All rather strange, to say the least.
From Bloomberg:
"China’s Stock Sale Ban Draws Scorns From Templeton, Wells Fargo"
Templeton Emerging Markets Group calls it an act of “desperation.” UBS Wealth Management labels it “extreme.” And Wells Fargo Funds Management says it just “postpones the inevitable.”
China’s decision to ban major stockholders from selling stakes in listed companies has drawn skepticism from foreign investors. The money managers, with combined assets of almost $4 trillion, say the latest step to stem the country’s equity rout is just another measure to meddle in the market and won’t be enough to restore investors’ confidence.
“It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone. “It actually creates more fear because it shows that they’ve lost control.”
The China Securities Regulatory Commission said Wednesday that investors with holdings exceeding 5 percent as well as corporate executives and directors are prohibited from selling stakes for six months. The rule is intended to stabilize capital markets amid an “unreasonable plunge” in share prices, it said.
While China has already ordered government-owned institutions to maintain or increase stock holdings, the CSRC directive expands the sales ban to non-state companies and potentially foreign investors who own major stakes in mainland businesses.
Thursday, 4 June 2015
Chinese market getting really hot
Article in Bloomberg: "Chinese Flock to Hong Kong for Stocks They Could Buy at Home"
Some snippets:
As mainland brokers tighten margin financing amid increased regulatory scrutiny, Hong Kong securities firms are finding a niche catering to Chinese investors. Amid the world’s biggest stock rally, a 141 percent one-year gain, the business presents a means to compete with bigger Chinese rivals who have been expanding in the city.
Investors in Hong Kong, including mainland visitors, have put 154 billion yuan ($25 billion) into Shanghai-traded equities since China began allowing purchases through the link in November.
Charles Li, CEO of Hong Kong Exchanges and Clearing Ltd., said he was unaware of how much money originated in Hong Kong or how much was round-tripping from China.
“These are just investors in Hong Kong, and I don’t care how they’ve got here,” he said in an interview. “Why I would single them out?”
Stephen Qin, a 28-year-old office worker in northern China, traveled 1,000 miles and set up an account in Hong Kong to trade Chinese stocks he could have bought at home.
“I can make more money if I can borrow more,” said Qin. “That’s why I chose Hong Kong.”
Something tells me this has to end badly, but the million dollar question is: when?
Some snippets:
As mainland brokers tighten margin financing amid increased regulatory scrutiny, Hong Kong securities firms are finding a niche catering to Chinese investors. Amid the world’s biggest stock rally, a 141 percent one-year gain, the business presents a means to compete with bigger Chinese rivals who have been expanding in the city.
Investors in Hong Kong, including mainland visitors, have put 154 billion yuan ($25 billion) into Shanghai-traded equities since China began allowing purchases through the link in November.
Charles Li, CEO of Hong Kong Exchanges and Clearing Ltd., said he was unaware of how much money originated in Hong Kong or how much was round-tripping from China.
“These are just investors in Hong Kong, and I don’t care how they’ve got here,” he said in an interview. “Why I would single them out?”
Stephen Qin, a 28-year-old office worker in northern China, traveled 1,000 miles and set up an account in Hong Kong to trade Chinese stocks he could have bought at home.
“I can make more money if I can borrow more,” said Qin. “That’s why I chose Hong Kong.”
Something tells me this has to end badly, but the million dollar question is: when?
Wednesday, 15 October 2014
Jim Chanos: "The Biggest Short"
Great article by Steven Drobny about Jim Chanos, the well known short seller.
Chanos recommends his fund as an insurance, for all investors who have a sizeable "long" portfolio in shares. Chanos will do well when shares tank, and bad if shares rise. But from time to time there is an industry (for instance property developers) that is badly hit while the overall market rises, in those times both Chanos' fund (shorting that industry) and the overall index can rise.
I normally don't short particular shares (I do from time to time short an index, but only rarely), but even then Chanos' observations are interesting. The way to discover candidates to short is basically the same as the way to discover which shares to avoid like the plague.
Also, observations about China's economy and it's huge property bubble.
Chanos recommends his fund as an insurance, for all investors who have a sizeable "long" portfolio in shares. Chanos will do well when shares tank, and bad if shares rise. But from time to time there is an industry (for instance property developers) that is badly hit while the overall market rises, in those times both Chanos' fund (shorting that industry) and the overall index can rise.
I normally don't short particular shares (I do from time to time short an index, but only rarely), but even then Chanos' observations are interesting. The way to discover candidates to short is basically the same as the way to discover which shares to avoid like the plague.
Also, observations about China's economy and it's huge property bubble.
Thursday, 4 September 2014
Shenzhen: visiting the world's manufacturing ecosystem
Great article by Joi Ito about the amazing ecosystem in Shenzen, one snippet:
Next we went to another kind of market. When we walked in, bunnie whispered to me, "EVERYTHING here is fake." There were "SVMSMUG" phones and things that looked like all kinds of phones we know. However, the more interesting phones were the phones that weren't like anything that existed anywhere else. Keychains, boom boxes, little cars, shiny ones, blinky ones -- it was an explosion of every possible iteration on phones that you could imagine. Many were designed by the so-called Shanzhai pirates who started by mostly making knockoffs of existing phones, but had become agile innovation shops for all kind of new ideas because of the proximity to the manufacturing ecosystem. They had access to the factories, but more importantly, they had access to the trade skills (and secrets) of all of the big brand phone manufacturers whose schematics could be found for sale in shops. These schematics and the engineers in the factories knew the state of the art and could apply this know-how to their own scrappy designs that could be more experimental and crazy. In fact many new technologies had been invented by these "pirates" such as the dual sim card phone.
The other amazing thing was the cost. There is a very low cost chipset that bunnie talks about that seems to be driving these phones which is not available outside of China, but they appear to do quad-band GSM, bluetooth, SMS, etc. on a chip that costs about $2. The retail price of the cheapest full featured phone is about $9. Yes. $9.
Next we went to another kind of market. When we walked in, bunnie whispered to me, "EVERYTHING here is fake." There were "SVMSMUG" phones and things that looked like all kinds of phones we know. However, the more interesting phones were the phones that weren't like anything that existed anywhere else. Keychains, boom boxes, little cars, shiny ones, blinky ones -- it was an explosion of every possible iteration on phones that you could imagine. Many were designed by the so-called Shanzhai pirates who started by mostly making knockoffs of existing phones, but had become agile innovation shops for all kind of new ideas because of the proximity to the manufacturing ecosystem. They had access to the factories, but more importantly, they had access to the trade skills (and secrets) of all of the big brand phone manufacturers whose schematics could be found for sale in shops. These schematics and the engineers in the factories knew the state of the art and could apply this know-how to their own scrappy designs that could be more experimental and crazy. In fact many new technologies had been invented by these "pirates" such as the dual sim card phone.
The other amazing thing was the cost. There is a very low cost chipset that bunnie talks about that seems to be driving these phones which is not available outside of China, but they appear to do quad-band GSM, bluetooth, SMS, etc. on a chip that costs about $2. The retail price of the cheapest full featured phone is about $9. Yes. $9.
Sunday, 31 August 2014
Millions of empty packets transported throughout China
After four years managing a private delivery company in the Chinese city of Ningbo, Chen Qian has acquired a new skill: he can tell which packets are fake even before he picks them up. Some are hollow boxes, some rattle with a piece of candy or a keychain. Recently, he says, merchants sending fake deliveries have started putting toilet paper rolls to give some heft.
Mr Chen says these account for about a quarter of the 4,000 packages his company handles every day. The phenomenon is widespread throughout China; a consequence of the country’s booming e-commerce industry and, specifically, a practice known as shuaxiaoliang, or literally – “sales brushing”. Online sellers are recruiting their friends, relatives and even professional fraudsters to make fake orders because shipping more goods would give them better placement – and therefore a better chance to garner more real sales – on websites such as Alibaba-owned Taobao.
“We’ve only started brushing recently,” said one Taobao shop owner in Hangzhou which sells hats and traditional silk scarves, who asked not to be identified. “There is no other choice for us. A lot of the other shops have been doing this for years, and we realised that no matter how well we did in sales, we could not compete with those who brushed.
A rather weird and wasteful practice, as described by the Financial Times.
Every system that allows itself to be gamed, will be gamed, if some people gain from that. Everyone would be better of if nobody would do this anymore, but how to coordinate this?
The above delivery company in Ningbo handles about 1.5 million packets of which about 400,000 are fake. But that is just one delivery company in one city, the total amount of empty packages per year must be huge, at least in the millions, probably more.
Mr Chen says these account for about a quarter of the 4,000 packages his company handles every day. The phenomenon is widespread throughout China; a consequence of the country’s booming e-commerce industry and, specifically, a practice known as shuaxiaoliang, or literally – “sales brushing”. Online sellers are recruiting their friends, relatives and even professional fraudsters to make fake orders because shipping more goods would give them better placement – and therefore a better chance to garner more real sales – on websites such as Alibaba-owned Taobao.
“We’ve only started brushing recently,” said one Taobao shop owner in Hangzhou which sells hats and traditional silk scarves, who asked not to be identified. “There is no other choice for us. A lot of the other shops have been doing this for years, and we realised that no matter how well we did in sales, we could not compete with those who brushed.
A rather weird and wasteful practice, as described by the Financial Times.
Every system that allows itself to be gamed, will be gamed, if some people gain from that. Everyone would be better of if nobody would do this anymore, but how to coordinate this?
The above delivery company in Ningbo handles about 1.5 million packets of which about 400,000 are fake. But that is just one delivery company in one city, the total amount of empty packages per year must be huge, at least in the millions, probably more.
Saturday, 30 August 2014
Three articles
Three interesting, but not very positive articles, for the full text please click on the links.
Pump and Dump: How to Rig the Entire IPO Market with just $20 Million
How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!
It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.
By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.
Inflating Snapchat’s valuation by $8 billion with a few million dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.
The Lawsuit That Could Legalize Pay-To-Play For Pension Fund Investments
Here’s a scenario to chew on:
An investment firm makes a campaign contribution to a city mayor. Later, the mayor appoints members to the city’s pension board. The pension board decides to hire the aforementioned investment firm to handle the pension fund’s investments.
Does something seem fishy about that situation?
The SEC says yes, and they have rules in place to prevent those “pay-to-play” scenarios.
But a recent lawsuit says no: investment managers should be able to donate money to whichever politicians they choose, even if those donations could present a conflict of interest down the line.
Detecting fraud a risk in China
It can be very risky to do things in China that are taken for granted in other countries.
Kun Huang, a Chinese-born Canadian citizen, is back in Vancouver after spending two years in a Chinese jail. His crime was contributing to research that led his employer to recommend short sales of Silvercorp Metals, a silver producer that is based in Canada but does its mining in China.
Mr Huang, now 37, returned to his native China in 2006 after graduating from the University of British Columbia with a degree in commerce. His parents immigrated to Vancouver in 1997, when he was 20 years old, and he became a Canadian citizen in 2002.
His job was to research Chinese companies, which were beginning to list on stock markets in the United States and Canada. He had been hired by Eos, a hedge fund run by Jon Carnes, a Canadian money manager, to “go through all the financial records in Chinese, talk to management and customers and suppliers,” he said in an interview.
At first, Eos looked for good stocks to buy, but Mr Carnes eventually gained a reputation for spotting Chinese frauds, which he publicised online under the name Alfred Little.
Mr Huang had worked on some of those reports but had no run-ins with the Chinese authorities until 2011. In June of that year, he was asked to look into Silvercorp. He said he found that some Silvercorp reports to the Chinese government showed its mines were not doing as well as they were in reports that the company issued in Canada.
He sent associates to the Ying Mine, Silvercorp’s largest operation, in Henan Province, about 500 miles southwest of Beijing. They filmed trucks leaving the mine with ore and picked up samples of the ore that fell off trucks.
In September, an Arthur Little report questioned whether Silvercorp had exaggerated the mine’s production. It said the samples it had picked up had substantially less silver in each ton of rock than the company claimed and that the volume of truck traffic was too light to account for all the ore Silvercorp said it had mined.
The company responded indignantly and demanded investigations into those who had attacked it.
Mr Huang was arrested on December 28 when he tried to fly to Hong Kong from Beijing. A police officer from Luoyang, the city closest to the mine, warned him that if he did not cooperate he could spend four or five years in jail. The officers questioning him took frequent calls – Mr Huang says he believes they were from Silvercorp officials – and then demanded such information as “the password to the Eos mail server”.
Within a few days, Mr Huang was released on bail, prohibited from leaving China. But that status ended abruptly in July 2012 after a column I [Floyd Norris] wrote for The New York Times appeared, quoting Mr Carnes as saying the Luoyang police “arrested, terrorised and forbid my researchers from communicating with me or performing any further research on Chinese companies”.
Mr Huang was rearrested, he told me, with police officers making clear that action was “directly in retaliation” for the column. He spent the next two years in the Luoyang detention centre, in a 300-square-foot cell that held as many as 34 other prisoners, according to a lawsuit Mr Huang filed this month against Silvercorp in Vancouver.
The previous articles about Silvercorp in The New York Times can be found here and here. A website by supporters of Mr Huang can be found here.
Pump and Dump: How to Rig the Entire IPO Market with just $20 Million
How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!
It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.
By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.
Inflating Snapchat’s valuation by $8 billion with a few million dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.
The Lawsuit That Could Legalize Pay-To-Play For Pension Fund Investments
Here’s a scenario to chew on:
An investment firm makes a campaign contribution to a city mayor. Later, the mayor appoints members to the city’s pension board. The pension board decides to hire the aforementioned investment firm to handle the pension fund’s investments.
Does something seem fishy about that situation?
The SEC says yes, and they have rules in place to prevent those “pay-to-play” scenarios.
But a recent lawsuit says no: investment managers should be able to donate money to whichever politicians they choose, even if those donations could present a conflict of interest down the line.
Detecting fraud a risk in China
It can be very risky to do things in China that are taken for granted in other countries.
Kun Huang, a Chinese-born Canadian citizen, is back in Vancouver after spending two years in a Chinese jail. His crime was contributing to research that led his employer to recommend short sales of Silvercorp Metals, a silver producer that is based in Canada but does its mining in China.
Mr Huang, now 37, returned to his native China in 2006 after graduating from the University of British Columbia with a degree in commerce. His parents immigrated to Vancouver in 1997, when he was 20 years old, and he became a Canadian citizen in 2002.
His job was to research Chinese companies, which were beginning to list on stock markets in the United States and Canada. He had been hired by Eos, a hedge fund run by Jon Carnes, a Canadian money manager, to “go through all the financial records in Chinese, talk to management and customers and suppliers,” he said in an interview.
At first, Eos looked for good stocks to buy, but Mr Carnes eventually gained a reputation for spotting Chinese frauds, which he publicised online under the name Alfred Little.
Mr Huang had worked on some of those reports but had no run-ins with the Chinese authorities until 2011. In June of that year, he was asked to look into Silvercorp. He said he found that some Silvercorp reports to the Chinese government showed its mines were not doing as well as they were in reports that the company issued in Canada.
He sent associates to the Ying Mine, Silvercorp’s largest operation, in Henan Province, about 500 miles southwest of Beijing. They filmed trucks leaving the mine with ore and picked up samples of the ore that fell off trucks.
In September, an Arthur Little report questioned whether Silvercorp had exaggerated the mine’s production. It said the samples it had picked up had substantially less silver in each ton of rock than the company claimed and that the volume of truck traffic was too light to account for all the ore Silvercorp said it had mined.
The company responded indignantly and demanded investigations into those who had attacked it.
Mr Huang was arrested on December 28 when he tried to fly to Hong Kong from Beijing. A police officer from Luoyang, the city closest to the mine, warned him that if he did not cooperate he could spend four or five years in jail. The officers questioning him took frequent calls – Mr Huang says he believes they were from Silvercorp officials – and then demanded such information as “the password to the Eos mail server”.
Within a few days, Mr Huang was released on bail, prohibited from leaving China. But that status ended abruptly in July 2012 after a column I [Floyd Norris] wrote for The New York Times appeared, quoting Mr Carnes as saying the Luoyang police “arrested, terrorised and forbid my researchers from communicating with me or performing any further research on Chinese companies”.
Mr Huang was rearrested, he told me, with police officers making clear that action was “directly in retaliation” for the column. He spent the next two years in the Luoyang detention centre, in a 300-square-foot cell that held as many as 34 other prisoners, according to a lawsuit Mr Huang filed this month against Silvercorp in Vancouver.
The previous articles about Silvercorp in The New York Times can be found here and here. A website by supporters of Mr Huang can be found here.
Monday, 28 April 2014
What is happening to the Chinese Renminbi?
The Chinese Renminbi used to be a "one-way bet", the currency slowly but surely appreciating against the USD.
And that sounded quite logically, given that the Chinese economy is growing the fastest of all the major economies in the world.
But that pattern seems to be broken recently:
Since reaching 6.05 in January 2014, the Renminbi has sharply weakened, to the current level of 6.26.
From ZeroHedge website:
"Someone Is Betting That The Chinese Currency Collapses By The End Of 2014?"
here is CLSA's Russel Napier on what the long-term fate of the Renminbi will be:
“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”
And that sounded quite logically, given that the Chinese economy is growing the fastest of all the major economies in the world.
But that pattern seems to be broken recently:
Since reaching 6.05 in January 2014, the Renminbi has sharply weakened, to the current level of 6.26.
From ZeroHedge website:
"Someone Is Betting That The Chinese Currency Collapses By The End Of 2014?"
here is CLSA's Russel Napier on what the long-term fate of the Renminbi will be:
“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”
Sunday, 20 April 2014
Anthony Bolton: I was wrong about China
"Anthony Bolton (born 7 March 1950) is one of the UK's best known investment fund managers and most successful investors, having managed the Fidelity Special Situations fund from December 1979 to December 2007. Over this 28-year period the fund achieved annualised growth of 19.5%, far in excess of the 13.5% growth of the wider stock exchange, turning a £1,000 investment into £147,000."
The above taken from Wikipedia. Pretty impressive, isn't it?
And then he did something he now definitely regrets:
"In 2009 he announced his return to fund management and in April 2010 moved to Hong Kong to begin managing the newly launched Fidelity China Special Situations PLC, an investment trust listed on the London Stock Exchange."
SCMP wrote recently an article with a rather harsh tone:
"Anthony Bolton retires with unfond memories of China"
"... despite his bullishness on China he was unable to repeat his successes with his China investments - to no great surprise from older hands here who felt he didn't have enough knowledge of the market to succeed in the short term.
He retired from Fidelity at the end of March. At a function to mark his retirement Bolton criticised standards of corporate governance on the mainland. Initially he thought corporate governance issues in China were about whether the chairman and the chief executive positions were held by the same person, or whether independent directors held a majority on the board.
"I found that corporate governance is a euphemism for 'are the figures real and is the management lying?', that is, fraud.
A longer and more detailed article in the Financial Times: "Anthony Bolton: ‘I was wrong about the market in China’"
“The most disappointing thing for me – and I am happy to admit it – is that I was wrong about the market in China,” the manager said during a press briefing on his last day in the office on March 31.
“I thought it would go up for four years but it has gone down for more than four years.”
Eventually he did outperform the relevant index, but in absolute terms, the performance is nothing to shout about:
Someone who has performed (very) well by investing in China is Malaysian Cheah Cheng Hye (founder of Value Partners), about whom I wrote here.
The above taken from Wikipedia. Pretty impressive, isn't it?
And then he did something he now definitely regrets:
"In 2009 he announced his return to fund management and in April 2010 moved to Hong Kong to begin managing the newly launched Fidelity China Special Situations PLC, an investment trust listed on the London Stock Exchange."
SCMP wrote recently an article with a rather harsh tone:
"Anthony Bolton retires with unfond memories of China"
"... despite his bullishness on China he was unable to repeat his successes with his China investments - to no great surprise from older hands here who felt he didn't have enough knowledge of the market to succeed in the short term.
He retired from Fidelity at the end of March. At a function to mark his retirement Bolton criticised standards of corporate governance on the mainland. Initially he thought corporate governance issues in China were about whether the chairman and the chief executive positions were held by the same person, or whether independent directors held a majority on the board.
"I found that corporate governance is a euphemism for 'are the figures real and is the management lying?', that is, fraud.
A longer and more detailed article in the Financial Times: "Anthony Bolton: ‘I was wrong about the market in China’"
“The most disappointing thing for me – and I am happy to admit it – is that I was wrong about the market in China,” the manager said during a press briefing on his last day in the office on March 31.
“I thought it would go up for four years but it has gone down for more than four years.”
Eventually he did outperform the relevant index, but in absolute terms, the performance is nothing to shout about:
Someone who has performed (very) well by investing in China is Malaysian Cheah Cheng Hye (founder of Value Partners), about whom I wrote here.
Monday, 27 January 2014
"Mega" default in China? (2)
It looks like, at least for the time being, the danger of a possible default that would have roiled the Chinese financial markets is over. However, there is still the case of setting a precedent and of "moral hazard".
The article is from Bloomberg:
China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
The accord staves off a default that threatened to roil China’s markets and stoke concerns of financial fragility in emerging economies after assets from Argentina’s peso to the Turkish lira plunged last week. The bailout may encourage risk-taking by wealthy investors in China’s $1.7 trillion trust industry -- the fastest-growing part of the shadow-banking system -- even as authorities try to curtail the nation’s debt.
“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
The article is from Bloomberg:
China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
The accord staves off a default that threatened to roil China’s markets and stoke concerns of financial fragility in emerging economies after assets from Argentina’s peso to the Turkish lira plunged last week. The bailout may encourage risk-taking by wealthy investors in China’s $1.7 trillion trust industry -- the fastest-growing part of the shadow-banking system -- even as authorities try to curtail the nation’s debt.
“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
Sunday, 26 January 2014
"Mega" default in China?
Article published by Forbes: "Mega Default In China Scheduled For January 31".
I think that the title is rather exaggerated (the amount in question is about USD 500 Million, very small for a country like China), but I do agree it might cause some shock to the financial system towards retail investors and there will be some reputational damage. Partly that will be a much needed wake up call. The full article (some comments by me in red):
On Friday, Chinese state media reported that China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products matures on January 31, the first day of the Year of the Horse.
The Industrial and Commercial Bank of China sold the China Credit Trust product to its customers in inland Shanxi province. This bank, the world’s largest by assets, on Thursday suggested it will not compensate investors, stating in a phone interview with Reuters that “a situation completely does not exist in which ICBC will assume the main responsibility.”
That depends on which promises the product was sold to the people. For instance, was the word "guarantee" used? Work for lawyers. It all sounds a bit like the infamous minibonds.
There should be no mystery why this investment, known as “2010 China Credit-Credit Equals Gold #1 Collective Trust Product,” is on the verge of default.
The Chinese are definitely number one in the world in inventing "creative" names.
China Credit Trust loaned the proceeds from sales of the 3.03 billion-yuan ($496.2 million) product to unlisted Shanxi Zhenfu Energy Group, a coal miner. The coal company probably is paying something like 12% for the money because Credit Equals Gold promised a 10% annual return to investors—more than three times current bank deposit rates—and China Credit Trust undoubtedly took a hefty cut of the interest.
Yes, I assume that China Credit Trust took a nice commission, I hope they were transparent about it. The problem with products with high commissions is that they are often sold, not bought. There is just too much incentive for the selling party.
Zhenfu was undoubtedly desperate for money. One of its vice chairmen was arrested in May 2012 for taking deposits without a banking license, undoubtedly trying to raise funds through unconventional channels. In any event, the company was permitted to borrow long after it should have been stopped—reports indicate that it had accumulated 5.9 billion yuan in obligations. Zhenfu, according to one Chinese newspaper account, has already been declared bankrupt with assets of less than 500 million yuan.
The Credit Equals Gold product is not the first troubled WMP, as these investments are known, to risk nonpayment, but Chinese officials have always managed to make investors whole. CITIC Trust did that in 2013 on a steel-loan product in Hubei province, and a mysterious third-party guarantee rescued a Hua Xia Bank WMP. An investment marketed by ICBC’s Suzhou branch was similarly repaid.
"WMP" or "Guaranteed Products" or "Structured Products", many names have been used in the past. The public must understand that when returns are "promised" that are way beyond the risk-free rate of Fixed Deposits, then of course there is a (quite real) risk. There is no free lunch here.
There has never been a default—other than one of timing—of a WMP, so the Credit Equals Gold product could be the first. If it is, it will edge out the WMP that invested in loans to Liansheng Resources Group, another Shanxi coal miner. Jilin Trust packaged Liansheng’s loans into a wealth management product sold by China Construction Bank , the country’s second-largest lender by assets, to its customers. Liansheng is in bankruptcy, and it looks like the WMP holders will not be repaid in full.
A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well. In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk. Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both. The result? The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.
I am not sure about that, of course the ultra-loose credit is basically spending money that still has to be earned, in other words future growth will decrease at least for some time. But China still has a lot going for it, so my guess is that it could mean a pretty large recession, partly cleansing the system, and then continued growth again. If China would really go into decades of misery, that would have tremendous negative effects for emerging markets which have partly piggybacked on China's growth.
Most analysts don’t worry about a WMP default. Their argument is that the People’s Bank of China, the central bank, is encouraging a failure of the Zhenfu product to teach investors to appreciate risk and such lesson will improve the allocation of credit nationwide. Furthermore, they reason the central authorities would never allow a default to threaten the system.
Observers make the logical argument that “to have a market meltdown, you have to have a market” and China does not have one. Instead, Beijing technocrats dictate outcomes.
That’s correct, but that is also why China is now heading to catastrophic failure. Because Chinese leaders have the power to prevent corrections, they do so. Because they do so, the underlying imbalances become larger. Because the underlying imbalances become larger, the inevitable corrections are severe. Downturns, which Beijing hates, are essential, allowing adjustments to be made while they are still relatively minor. The last year-on-year contraction in China’s gross domestic product, according to the official National Bureau of Statistics, occurred in 1976, the year Mao Zedong died.
Marc Faber commented that indeed China has invested too much in for instance infrastructure. But if one had the choice to either invest too much (China) or almost nothing (India), then he would still prefer the first. China will continue to grow and will start eventually using the infrastructure.
Why will China’s next correction be historic in its severity? Because Chinese leaders will prevent adjustments until they no longer have the ability to do so. When they no longer have that ability, their system will simply fail. Then, there will be nothing they can do to prevent the freefall.
We are almost at that critical point, as events last June and December demonstrate. The PBOC did not try to tighten credit as analysts said in June and December; it simply did not add liquidity. The failure to add liquidity caused interbank rates to soar and banks to default on their interbank obligations. In the face of the resulting crises, the central bank backed down both times, injecting more money into state banks and the economy. So Chinese leaders showed us twice last year that they now have no ability—or no will—to deal with the most important issue they face, the out-of-control creation of debt.
There are rumors that local authorities in Shanxi will either find cash so that Liansheng can pay back its loans or force institutions to roll over the WMP marketed by Jilin Trust. Similarly, there are suggestions that ICBC, despite its we’re-not-responsible statement, will produce dough for the Credit Equals Gold investors. Others say China Credit Trust, China’s third-largest such group as measured by assets, will repay investors in part. Repayment will avoid an historic default and postpone a reckoning. In all probability, authorities will be able to get past Zhenfu if they try to do so.
Even if Beijing makes sure there is no default on January 31, we should not feel relief. Just as Zhenfu followed Liansheng, there will be another WMP borrower on the edge of disaster after Zhenfu. And there are many Lianshengs and Zhenfus out there. There may have been 11 trillion yuan in WMPs at the end of last year.
And at the same time China’s money supply and credit are still expanding. Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth. Optimists say China is getting its credit addiction under control, but that’s not correct. In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics. That appears to be in excess of credit expansion in 2012.
Even if credit expansion slowed last year, Silvercrest Asset Management’s Patrick Chovanec tells us why we should be concerned. As he wrote today, “Looking purely at the decline in the year-on-year rate of credit expansion is kind of like arguing that if I chase my shot of vodka with a pint of beer, I’m actually exercising moderation because the alcohol proof level of my drinks is falling.”
I think that the title is rather exaggerated (the amount in question is about USD 500 Million, very small for a country like China), but I do agree it might cause some shock to the financial system towards retail investors and there will be some reputational damage. Partly that will be a much needed wake up call. The full article (some comments by me in red):
On Friday, Chinese state media reported that China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products matures on January 31, the first day of the Year of the Horse.
The Industrial and Commercial Bank of China sold the China Credit Trust product to its customers in inland Shanxi province. This bank, the world’s largest by assets, on Thursday suggested it will not compensate investors, stating in a phone interview with Reuters that “a situation completely does not exist in which ICBC will assume the main responsibility.”
That depends on which promises the product was sold to the people. For instance, was the word "guarantee" used? Work for lawyers. It all sounds a bit like the infamous minibonds.
There should be no mystery why this investment, known as “2010 China Credit-Credit Equals Gold #1 Collective Trust Product,” is on the verge of default.
The Chinese are definitely number one in the world in inventing "creative" names.
China Credit Trust loaned the proceeds from sales of the 3.03 billion-yuan ($496.2 million) product to unlisted Shanxi Zhenfu Energy Group, a coal miner. The coal company probably is paying something like 12% for the money because Credit Equals Gold promised a 10% annual return to investors—more than three times current bank deposit rates—and China Credit Trust undoubtedly took a hefty cut of the interest.
Yes, I assume that China Credit Trust took a nice commission, I hope they were transparent about it. The problem with products with high commissions is that they are often sold, not bought. There is just too much incentive for the selling party.
Zhenfu was undoubtedly desperate for money. One of its vice chairmen was arrested in May 2012 for taking deposits without a banking license, undoubtedly trying to raise funds through unconventional channels. In any event, the company was permitted to borrow long after it should have been stopped—reports indicate that it had accumulated 5.9 billion yuan in obligations. Zhenfu, according to one Chinese newspaper account, has already been declared bankrupt with assets of less than 500 million yuan.
The Credit Equals Gold product is not the first troubled WMP, as these investments are known, to risk nonpayment, but Chinese officials have always managed to make investors whole. CITIC Trust did that in 2013 on a steel-loan product in Hubei province, and a mysterious third-party guarantee rescued a Hua Xia Bank WMP. An investment marketed by ICBC’s Suzhou branch was similarly repaid.
"WMP" or "Guaranteed Products" or "Structured Products", many names have been used in the past. The public must understand that when returns are "promised" that are way beyond the risk-free rate of Fixed Deposits, then of course there is a (quite real) risk. There is no free lunch here.
There has never been a default—other than one of timing—of a WMP, so the Credit Equals Gold product could be the first. If it is, it will edge out the WMP that invested in loans to Liansheng Resources Group, another Shanxi coal miner. Jilin Trust packaged Liansheng’s loans into a wealth management product sold by China Construction Bank , the country’s second-largest lender by assets, to its customers. Liansheng is in bankruptcy, and it looks like the WMP holders will not be repaid in full.
A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well. In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk. Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both. The result? The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.
I am not sure about that, of course the ultra-loose credit is basically spending money that still has to be earned, in other words future growth will decrease at least for some time. But China still has a lot going for it, so my guess is that it could mean a pretty large recession, partly cleansing the system, and then continued growth again. If China would really go into decades of misery, that would have tremendous negative effects for emerging markets which have partly piggybacked on China's growth.
Most analysts don’t worry about a WMP default. Their argument is that the People’s Bank of China, the central bank, is encouraging a failure of the Zhenfu product to teach investors to appreciate risk and such lesson will improve the allocation of credit nationwide. Furthermore, they reason the central authorities would never allow a default to threaten the system.
Observers make the logical argument that “to have a market meltdown, you have to have a market” and China does not have one. Instead, Beijing technocrats dictate outcomes.
That’s correct, but that is also why China is now heading to catastrophic failure. Because Chinese leaders have the power to prevent corrections, they do so. Because they do so, the underlying imbalances become larger. Because the underlying imbalances become larger, the inevitable corrections are severe. Downturns, which Beijing hates, are essential, allowing adjustments to be made while they are still relatively minor. The last year-on-year contraction in China’s gross domestic product, according to the official National Bureau of Statistics, occurred in 1976, the year Mao Zedong died.
Marc Faber commented that indeed China has invested too much in for instance infrastructure. But if one had the choice to either invest too much (China) or almost nothing (India), then he would still prefer the first. China will continue to grow and will start eventually using the infrastructure.
Why will China’s next correction be historic in its severity? Because Chinese leaders will prevent adjustments until they no longer have the ability to do so. When they no longer have that ability, their system will simply fail. Then, there will be nothing they can do to prevent the freefall.
We are almost at that critical point, as events last June and December demonstrate. The PBOC did not try to tighten credit as analysts said in June and December; it simply did not add liquidity. The failure to add liquidity caused interbank rates to soar and banks to default on their interbank obligations. In the face of the resulting crises, the central bank backed down both times, injecting more money into state banks and the economy. So Chinese leaders showed us twice last year that they now have no ability—or no will—to deal with the most important issue they face, the out-of-control creation of debt.
There are rumors that local authorities in Shanxi will either find cash so that Liansheng can pay back its loans or force institutions to roll over the WMP marketed by Jilin Trust. Similarly, there are suggestions that ICBC, despite its we’re-not-responsible statement, will produce dough for the Credit Equals Gold investors. Others say China Credit Trust, China’s third-largest such group as measured by assets, will repay investors in part. Repayment will avoid an historic default and postpone a reckoning. In all probability, authorities will be able to get past Zhenfu if they try to do so.
Even if Beijing makes sure there is no default on January 31, we should not feel relief. Just as Zhenfu followed Liansheng, there will be another WMP borrower on the edge of disaster after Zhenfu. And there are many Lianshengs and Zhenfus out there. There may have been 11 trillion yuan in WMPs at the end of last year.
And at the same time China’s money supply and credit are still expanding. Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth. Optimists say China is getting its credit addiction under control, but that’s not correct. In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics. That appears to be in excess of credit expansion in 2012.
Even if credit expansion slowed last year, Silvercrest Asset Management’s Patrick Chovanec tells us why we should be concerned. As he wrote today, “Looking purely at the decline in the year-on-year rate of credit expansion is kind of like arguing that if I chase my shot of vodka with a pint of beer, I’m actually exercising moderation because the alcohol proof level of my drinks is falling.”
Thursday, 23 January 2014
China's princelings using offshore havens
Update 1: it seems some people might not have liked the story in The Guardian, since its website is blocked in China, according to this source.
Update 2: the links below don't seem to be working with Internet Explorer, but I don't have a problem with Google Chrome
Update 3: I have changed the title of this posting, although BVI's are probably a tax heaven for some, I did mean "havens", not "heavens"
The Guardian published details of senior Chinese political leaders and their families using offshore accounts in the British Virgin Islands (BVI).
"More than a dozen family members of China's top political and military leaders are making use of offshore companies based in the British Virgin Islands, leaked financial documents reveal.
The brother-in-law of China's current president, Xi Jinping, as well as the son and son-in-law of former premier Wen Jiabao are among the political relations making use of the offshore havens, financial records show.
The disclosure of China's use of secretive financial structures is the latest revelation from "Offshore Secrets", a two-year reporting effort led by the International Consortium of Investigative Journalists (ICIJ), which obtained more than 200 gigabytes of leaked financial data from two companies in the British Virgin Islands, and shared the information with the Guardian and other international news outlets.
In all, the ICIJ data reveals more than 21,000 clients from mainland China and Hong Kong have made use of offshore havens in the Caribbean, adding to mounting scrutiny of the wealth and power amassed by family members of the country's inner circle.
As neither Chinese officials nor their families are required to issue public financial disclosures, citizens in the country and abroad have been left largely in the dark about the elite's use of offshore structures which can facilitate the avoidance of tax, or moving of money overseas. Between $1tn and $4tn in untraced assets have left China since 2000, according to estimates."
The detailed information can be found here.
The database also has many entries regarding Malaysia and Singapore. The list contains many VIP's and familiar companies.
Being on the list itself is not necessarily proof of any wrong doing. Neither is the absence from the list a proof of the opposite. Especially in certain global industries BVI's are often used.
For Malaysia, we often read stories like "foreigners pumping several billion into the local share market" etc. Readers should be aware that companies based in tax heavens like BVI count (as far as I know) as foreign companies.
In other words, the "foreigners" could actually be Malaysians who manage and hold their assets at these foreign places.
One prime example is Ananda Krishnan, who uses a complicated company structure, involving companies in the Jersey Islands and Curacao:
Update 2: the links below don't seem to be working with Internet Explorer, but I don't have a problem with Google Chrome
Update 3: I have changed the title of this posting, although BVI's are probably a tax heaven for some, I did mean "havens", not "heavens"
The Guardian published details of senior Chinese political leaders and their families using offshore accounts in the British Virgin Islands (BVI).
"More than a dozen family members of China's top political and military leaders are making use of offshore companies based in the British Virgin Islands, leaked financial documents reveal.
The brother-in-law of China's current president, Xi Jinping, as well as the son and son-in-law of former premier Wen Jiabao are among the political relations making use of the offshore havens, financial records show.
The disclosure of China's use of secretive financial structures is the latest revelation from "Offshore Secrets", a two-year reporting effort led by the International Consortium of Investigative Journalists (ICIJ), which obtained more than 200 gigabytes of leaked financial data from two companies in the British Virgin Islands, and shared the information with the Guardian and other international news outlets.
In all, the ICIJ data reveals more than 21,000 clients from mainland China and Hong Kong have made use of offshore havens in the Caribbean, adding to mounting scrutiny of the wealth and power amassed by family members of the country's inner circle.
As neither Chinese officials nor their families are required to issue public financial disclosures, citizens in the country and abroad have been left largely in the dark about the elite's use of offshore structures which can facilitate the avoidance of tax, or moving of money overseas. Between $1tn and $4tn in untraced assets have left China since 2000, according to estimates."
The detailed information can be found here.
The database also has many entries regarding Malaysia and Singapore. The list contains many VIP's and familiar companies.
Being on the list itself is not necessarily proof of any wrong doing. Neither is the absence from the list a proof of the opposite. Especially in certain global industries BVI's are often used.
For Malaysia, we often read stories like "foreigners pumping several billion into the local share market" etc. Readers should be aware that companies based in tax heavens like BVI count (as far as I know) as foreign companies.
In other words, the "foreigners" could actually be Malaysians who manage and hold their assets at these foreign places.
One prime example is Ananda Krishnan, who uses a complicated company structure, involving companies in the Jersey Islands and Curacao:
In it self there might be nothing wrong with the structures, but it will definitely make live more difficult for the authorities.
Sunday, 10 November 2013
Marc Faber: China could spark a bigger crisis than in 2008
An alarming credit boom in China could trigger a global financial crisis that would make the one in 2008 look mild by comparison, says old gloomy eyes, Marc Faber.
“If I am telling you that we had a credit crisis in 2008 because we had too much credit in the economy, then there is that much more credit as a percentage of the economy now,” the author of The Gloom, Boom & Doom Report told CNBC late Thursday. “So we are in a worse position than we were back then.”
China, in particular, has seen credit as a percentage of the economy jump 50% in the last four and a half years, said Faber, the “fastest credit growth you can image in the whole of Asia.”
He’s not alone in this China worry, as lots of economists have been warning about rapid credit growth there, even as officials are trying to curb it.
Meanwhile, Deutsche Bank strategist John-Paul Smith told clients on Wednesday that China’s growth model continues to be based on “ever-expanding debt, which leaves the country and financial markets very vulnerable to any potential loss of from investors and lenders.”
That’s even though China may change forever this weekend, as the Communist Party holds its Third Plenum, widely expected to introduce lots of reforms.
In his note, Smith says Deutsche Bank has had a pretty straightforward preference for developed over emerging markets the past three years. But that that now rests purely on its negative view of EM, rather than the “positive attractions of U.S. equities, which has become a consensus call”, he points out.
“The U.S. market now appears somewhat overvalued, and vulnerable over the medium term to a shift away from capital to labor from a fundamental perspective, but could be headed for bubble territory if the situation with China and commodities plays out as we anticipate,” he said.
Faber warns that China isn’t the only problem area. Other Asian countries are also seeing big jumps in household debt.
“Government debt has not gone up that much, but household debt has,” said Faber. “In Thailand, where I spend a lot of time, we have had no recession, but we have had no growth either. It’s the same in Singapore and Hong Kong.”
The above from an article at MarketWatch. Regarding the last comment, this might also be very true for Malaysia. That is, if inflation is correctly reported (not the simply incredible low numbers that have been officially reported), and thus the inflation-corrected GDP.
The following article in The Economist "Household debt in Asia" seems to agree with Faber's last paragraph:
"A new report from Standard & Poor’s, a credit-rating agency, worries about weakening credit quality at Asian banks, as loose lending practices lead to rapid loan growth, resulting in a sharp rise in household debt. A recent World Bank study identified Malaysia and Thailand as having the largest household debts, as a share of GDP, among eastern Asia’s developing economies. In Malaysia, where household debt now exceeds 80% of GDP, the government has been seeking to curb credit growth. Thailand’s government boosted access to credit following the country’s big floods in 2011. The recent slowing of growth in many Asian economies raises concerns about the sustainability of all this personal debt."
“If I am telling you that we had a credit crisis in 2008 because we had too much credit in the economy, then there is that much more credit as a percentage of the economy now,” the author of The Gloom, Boom & Doom Report told CNBC late Thursday. “So we are in a worse position than we were back then.”
China, in particular, has seen credit as a percentage of the economy jump 50% in the last four and a half years, said Faber, the “fastest credit growth you can image in the whole of Asia.”
He’s not alone in this China worry, as lots of economists have been warning about rapid credit growth there, even as officials are trying to curb it.
Meanwhile, Deutsche Bank strategist John-Paul Smith told clients on Wednesday that China’s growth model continues to be based on “ever-expanding debt, which leaves the country and financial markets very vulnerable to any potential loss of from investors and lenders.”
That’s even though China may change forever this weekend, as the Communist Party holds its Third Plenum, widely expected to introduce lots of reforms.
In his note, Smith says Deutsche Bank has had a pretty straightforward preference for developed over emerging markets the past three years. But that that now rests purely on its negative view of EM, rather than the “positive attractions of U.S. equities, which has become a consensus call”, he points out.
“The U.S. market now appears somewhat overvalued, and vulnerable over the medium term to a shift away from capital to labor from a fundamental perspective, but could be headed for bubble territory if the situation with China and commodities plays out as we anticipate,” he said.
Faber warns that China isn’t the only problem area. Other Asian countries are also seeing big jumps in household debt.
“Government debt has not gone up that much, but household debt has,” said Faber. “In Thailand, where I spend a lot of time, we have had no recession, but we have had no growth either. It’s the same in Singapore and Hong Kong.”
The above from an article at MarketWatch. Regarding the last comment, this might also be very true for Malaysia. That is, if inflation is correctly reported (not the simply incredible low numbers that have been officially reported), and thus the inflation-corrected GDP.
The following article in The Economist "Household debt in Asia" seems to agree with Faber's last paragraph:
"A new report from Standard & Poor’s, a credit-rating agency, worries about weakening credit quality at Asian banks, as loose lending practices lead to rapid loan growth, resulting in a sharp rise in household debt. A recent World Bank study identified Malaysia and Thailand as having the largest household debts, as a share of GDP, among eastern Asia’s developing economies. In Malaysia, where household debt now exceeds 80% of GDP, the government has been seeking to curb credit growth. Thailand’s government boosted access to credit following the country’s big floods in 2011. The recent slowing of growth in many Asian economies raises concerns about the sustainability of all this personal debt."
Saturday, 17 August 2013
Great Marc Faber interview and understating of inflation
Great interview with Marc Faber by The Prospect Group in which Faber also mentions Malaysia several times.
"Shadow banking, market psychology, & the global impact of American monetary policy"
"Chinese foreign exchange reserves & the Sino-American geopolitical standoff"
"Growth in Southeast Asia & the economic future of Malaysia & Thailand"
"Higher education & protecting yourself in the coming economic collapse"
Faber mentions that the cost of living has increased so much in Asia, he estimates the inflation to be about 5%. In Malaysia inflation is reported as being between 1% and 2%, which is simply incredible.
Since the inflation is used to calculate the real GDP (GDP corrected for inflation, the factor that is used is slightly different from the consumer inflation, but very similar and highly correlated), basically the real GDP growth is clearly overstated.
Tom Holland wrote an article in the SCMP "Official manipulation adds 10 per cent to China's GDP" about the same subject (but then applied to China), some snippets:
Analysts have always suspected Beijing's statisticians manipulate China's economic data to come up with growth figures that are acceptable to the country's leadership.
[with Malaysia having the highest Power Distance Index in the world, surely government servants are also motivated to construct inflation numbers acceptable to the Malaysian leadership]
Above all, they believe that the National Bureau of Statistics systematically understates China's economy-wide inflation rate.
As a result, when Beijing's bean counters correct the raw data for nominal gross domestic product to adjust for inflation, they come up with a figure for China's real growth rate (see the first chart) that is anything but real. Instead it is too high.
Suspicion - even strong suspicion - comes easily. But working out exactly how officials tweak the data, and estimating the size of the resulting discrepancy between appearance and reality, is altogether trickier.
Now a new study by Christopher Balding from the HSBC Business School at Peking University sheds some welcome light on just how the data is manipulated.
Balding argues that housing costs - usually a major item in any country's consumer price index inflation basket - are both understated and underweighted by China's statistical agency.
He points out that, according to the official data, between 2000 and 2011 Chinese house prices rose by just 8 per cent. Urban prices climbed just 6 per cent.
As Balding notes, the modesty of this increase stretches credulity to the limit, especially over a period during which China's nominal GDP quintupled and its money supply expanded sixfold (see the second chart).
"The claim that the housing component of CPI grew by less than 10 per cent between 2000 and 2011 is nothing less than comical," he writes.
Compounding the error, officials assume that 80 per cent of the population live in China's cities, where they say property prices have risen more slowly than in rural areas.
In reality, some 48 per cent of people still live in the countryside.
And then to cap everything, housing barely contributes to the official inflation figures. Between 2000 and 2010, housing costs made up just 13 per cent of China's official consumer inflation basket.
His results show that economy-wide price levels today are likely to be about 10 per cent higher than China's implied GDP deflator index indicates. Taking the third-party price data, and assuming a 30 per cent housing cost weighting, the deviation could actually be as high as 16 per cent.
Applying this correction to China's output data, argues Balding, reduces China's real GDP by between 8 per cent and 12 per cent, knocking about 5 trillion yuan (HK$6.3 trillion) off 2012's figure.
"It is disturbing that a statistical body would so obviously manipulate and produce blatantly fraudulent data," Balding writes.
"Given the relative ease with which obvious statistical manipulation was found, it is quite likely that less obvious fraud is present.
"It seems likely that much larger revisions to Chinese real GDP and other economic data are needed to produce more reliable statistics."
"Shadow banking, market psychology, & the global impact of American monetary policy"
"Chinese foreign exchange reserves & the Sino-American geopolitical standoff"
"Growth in Southeast Asia & the economic future of Malaysia & Thailand"
"Higher education & protecting yourself in the coming economic collapse"
Faber mentions that the cost of living has increased so much in Asia, he estimates the inflation to be about 5%. In Malaysia inflation is reported as being between 1% and 2%, which is simply incredible.
Since the inflation is used to calculate the real GDP (GDP corrected for inflation, the factor that is used is slightly different from the consumer inflation, but very similar and highly correlated), basically the real GDP growth is clearly overstated.
Tom Holland wrote an article in the SCMP "Official manipulation adds 10 per cent to China's GDP" about the same subject (but then applied to China), some snippets:
Analysts have always suspected Beijing's statisticians manipulate China's economic data to come up with growth figures that are acceptable to the country's leadership.
[with Malaysia having the highest Power Distance Index in the world, surely government servants are also motivated to construct inflation numbers acceptable to the Malaysian leadership]
Above all, they believe that the National Bureau of Statistics systematically understates China's economy-wide inflation rate.
As a result, when Beijing's bean counters correct the raw data for nominal gross domestic product to adjust for inflation, they come up with a figure for China's real growth rate (see the first chart) that is anything but real. Instead it is too high.
Suspicion - even strong suspicion - comes easily. But working out exactly how officials tweak the data, and estimating the size of the resulting discrepancy between appearance and reality, is altogether trickier.
Now a new study by Christopher Balding from the HSBC Business School at Peking University sheds some welcome light on just how the data is manipulated.
Balding argues that housing costs - usually a major item in any country's consumer price index inflation basket - are both understated and underweighted by China's statistical agency.
He points out that, according to the official data, between 2000 and 2011 Chinese house prices rose by just 8 per cent. Urban prices climbed just 6 per cent.
As Balding notes, the modesty of this increase stretches credulity to the limit, especially over a period during which China's nominal GDP quintupled and its money supply expanded sixfold (see the second chart).
"The claim that the housing component of CPI grew by less than 10 per cent between 2000 and 2011 is nothing less than comical," he writes.
Compounding the error, officials assume that 80 per cent of the population live in China's cities, where they say property prices have risen more slowly than in rural areas.
In reality, some 48 per cent of people still live in the countryside.
And then to cap everything, housing barely contributes to the official inflation figures. Between 2000 and 2010, housing costs made up just 13 per cent of China's official consumer inflation basket.
His results show that economy-wide price levels today are likely to be about 10 per cent higher than China's implied GDP deflator index indicates. Taking the third-party price data, and assuming a 30 per cent housing cost weighting, the deviation could actually be as high as 16 per cent.
Applying this correction to China's output data, argues Balding, reduces China's real GDP by between 8 per cent and 12 per cent, knocking about 5 trillion yuan (HK$6.3 trillion) off 2012's figure.
"It is disturbing that a statistical body would so obviously manipulate and produce blatantly fraudulent data," Balding writes.
"Given the relative ease with which obvious statistical manipulation was found, it is quite likely that less obvious fraud is present.
"It seems likely that much larger revisions to Chinese real GDP and other economic data are needed to produce more reliable statistics."
Sunday, 21 April 2013
Late MCA leader accused of stealing A$20m from Aussie firm (2)
I wrote before about Zheng He Global Capital, the Australian listed company named after the famous Chinese explorer:
I doubt if Zheng He would be happy with his name being used given the rather unfortunate events that happened in the company.
The Sydney Morning Herald followed up on this case with several articles, written by "Insider", Ian McIlwraith. Below the texts in full, here some interesting snippets:
Disappearing, reappearing loans test ASIC's reach (May 30, 2012)
Australia's relations with Malaysia may be tested again if the corporate watchdog pursues claims that a former Malaysian government minister, Dato Tan Tian Hong, took more than $20 million from an ASX-listed company to repay a personal debt.
The now suspended, China-based credit guarantee company Zheng He Global Capital told shareholders this week that Tan, who died last year, used his position as executive chairman to organise secret 136.79 million yuan ($21 million) loans to 10 companies associated with fellow Zheng He director, Rong Cheng Wei.
Zheng He's acting chairman, Andrew Smith, who has spent this year trying to unravel what happened, believes the loans were designed to use the public company's cash to repay $US18.8 million borrowed by Tan from Wei in April 2010 to facilitate Zheng He's public float.
Tan might be out of reach, but Smith has sent letters of demand to his deceased estate in Malaysia.
Fascinatingly, about the same time as Smith's lawyers were drawing up those demands, Tan's widow, Catherine, used her family's 55.3 per cent shareholding in Zheng He to demand the appointment of four new directors to the board.
With no hope of beating that board challenge, Smith yesterday afternoon bowed to the inevitable and convened a board meeting, agreeing to the new appointments.
It will be interesting to see whether they decide to continue legal action against the Tans. Insider suspects investors in Zheng He can kiss that money, and probably their investments, goodbye.
Smith, though, may have bought them some insurance. Insider hears he met representatives of the Australian Securities and Investments Commission yesterday and provided them with a detailed file on all the events.
ASIC's difficulty is going to be that while Zheng He is in Australia, the business that made the loans is in China, the accused ''thief'' is now dead, and the other former director said to be involved in the suspect loans, Wei, is also in China. Insider understands neither Tan nor Wei have assets in Australia, apart from Zheng He shares.
The political thorn for ASIC's chairman, Greg Medcraft, will be that Tan was a respected leader of the Malaysian Chinese Association political party, and served as a deputy finance minister and deputy minister in the Prime Minister's office under former Malaysian strongman Dr Mahathir Mohamad. Mahathir and his wife attended the funeral.
The Zheng He loans story does not, however, end there. Rong Cheng Wei's companies, according to Smith, defaulted on all the loans - leaving Zheng He indebted to the banks last August.
Smith said that in a recent meeting with Wei ''he confirmed that, as a consequence of the defaults under the finance arrangements, the … loans had now been repaid in full''.
In Zheng He's prospectus, Wei was not only credited with playing a role in the financing of Zhouning county's public welfare system, he was awarded ''the Excellent Entrepreneur award from Zhouning county's police force from 2003 to 2006''.
Tan's widow signed an agreement last August taking responsibility for the loan defaults, according to Smith, and the deposit around that same time of 140 million yuan into Zheng He bank accounts, by two China-based companies associated with a Lin Liang, were assumed to be the product of that agreement.
In February this year, a routine audit found the cash was no longer in the company's bank accounts, having been withdrawn on the authorisation of Lin (who had been appointed chairman of Zheng He's China subsidiary).
Smith's investigation in recent weeks discovered that Lin believed his companies had only ever been lending the money to Zheng He, and had taken it back.
The deal appears to have been a little more complex than that, though, because the money was moved into Zheng He accounts near the end of each month, and out again at the beginning of the following month - meaning Zheng He's bank statements each month showed that the money was there, but in reality it was being used by Lin's companies.
Short Stay (June 8, 2012)
Robert Payne, who joined the board of the floundering Zheng He Global Capital on May 29, looks like setting a record for the briefest appearance on the board of a listed company.
Zheng He told the market late yesterday that Payne has quit - and his resignation is backdated to June 1, which means that he lasted a mere 48 hours on the board of a company that once had aspirations to be a financier to China but is now looking collapse in the face.
Insider is not wholly surprised that Payne has departed. The last time Zheng He was mentioned here was when the Malaysia-based major shareholder decided to nominate him and three others to the company's board, giving them voting control.
Their nominations had come hot on the heels of Zheng He's executive chairman, Andrew Smith, launching legal action against entities associated with that same shareholder after spending some months trying to find out why $20 million had disappeared from the company's bank accounts.
Smith fell on his directorial sword on May 30, after the new directors rolled across the boardroom border - as did two other former directors.
He had already fired himself as an executive the day before, although his termination was not due to take effect until last Friday.
Insider also hears that not long before he did leave, Smith had delivered a fat file to the corporate walloper on the results of his investigations, showing where he thought the $20 million had gone.
The question now is whether the Australian Securities and Investments Commission wants to chase an investigation through Australia, China and Malaysia.
Small and suspended from ASX but law is the law (August 3, 2012)
ZHENG He Global Capital might be a tiny company, and it has been suspended from ASX trading for nearly six months - but that does not excuse it from complying with the Corporations Act.
Yet, from what Insider can work out, it is now a fortnight since it became a two director company, and neither of those live in Australia.
For those of you who do not sleep with a copy of the legislation, Insider can tell you that Australia's company law says very clearly that a public company must have a minimum of three directors - and at least two of them must be Australian residents.
Zheng He fails on both hurdles, judging by its most recent announcements to the ASX - although with $20 million of shareholders' funds having inexplicably evaporated from the company's bank accounts in China, that may be the least of the sins committed against investors.
Local investors only know about the missing money, and its circuitous path through Chinese businessmen and the family bank accounts of Zheng He's deceased former chairman, Dato Tan Tian Hong - who was also a deputy finance minister of Malaysia - because of the efforts of former chairman Andrew Smith.
Smith tracked down how and where the $20 million went, although Zheng He's empty coffers and the fact that any litigation would require going to court in both Malaysia and China limited his efforts. He was planning to send a legal letter of demand to the Tan family when the former chairman's widow, Catherine, used her family's 55.3 per cent shareholding in Zheng He to thrust four new directors onto the board.
Rather than spend money holding an extraordinary meeting to defend their position, the existing board fell on their directorial swords, and Tan's four nominees took control.
Based on the filings of those four with the Australian Securities and Investments Commission on their appointment, Insider can only conclude that Zheng He has been in breach of the law since May 30 because only one of the men, Melbourne-based Robert Payne, lived in Australia.
Payne resigned within 48 hours, which makes Insider wonder whether Payne realised that consenting to being a director of Zheng He may not have been the smartest thing he had done.
Of the three remaining directors, two lived in Malaysia and the other in China. On July 20, one of the Malaysian directors quit, leaving two people. No explanations were given for either departure, and there was no indication that the company acknowledged it was in breach of the law and had plans to remedy the situation.
Insider finds it difficult to believe that ASIC is not aware of Zheng He's status, because the word was that former chairman Smith made a complaint to the corporate regulator before he left.
Not only that, the new board of Zheng He has said nothing about its plans for a company that has no employees, no business - but does have a theoretical $20 million claim against interests associated with its major shareholder.
Old favourites appear once more in ASX hall of shame (August 24, 2012)
Finally, one of Insider's favourite listed companies, Zheng He Global Capital, is also facing delisting for not paying fees. As noted earlier this month, Zheng He has had only two directors, neither of them Australian residents, since July - which would seem to put it in breach of a whole lot more than not paying listing fees. Maybe those two are too busy trying to recover the $20 million that shareholders thought was the company's assets, but turned out to be claimed, and banked, by the Malaysian-based family that is Zheng He's largest shareholder.
That is a shame, because if it is delisted, shareholders may never hear about how the hunt for the money is going.
I doubt if Zheng He would be happy with his name being used given the rather unfortunate events that happened in the company.
The Sydney Morning Herald followed up on this case with several articles, written by "Insider", Ian McIlwraith. Below the texts in full, here some interesting snippets:
- "The deal appears to have been a little more complex than that, though, because the money was moved into Zheng He accounts near the end of each month, and out again at the beginning of the following month - meaning Zheng He's bank statements each month showed that the money was there, but in reality it was being used by Lin's companies". This kind of tactics is rumoured to happen more often in China, with certain banks supporting this kind of dodgy tactics.
- Robert Payne only lasted two days as director, as described in the second article, aptly titled "Short Stay"
- "That is a shame, because if it is delisted, shareholders may never hear about how the hunt for the money is going". And that is exactly what happened, the company is delisted, and I doubt if the ASIC (Australian Securities and Investments Commission) is able to do anything at all about what occurred.
Disappearing, reappearing loans test ASIC's reach (May 30, 2012)
Australia's relations with Malaysia may be tested again if the corporate watchdog pursues claims that a former Malaysian government minister, Dato Tan Tian Hong, took more than $20 million from an ASX-listed company to repay a personal debt.
The now suspended, China-based credit guarantee company Zheng He Global Capital told shareholders this week that Tan, who died last year, used his position as executive chairman to organise secret 136.79 million yuan ($21 million) loans to 10 companies associated with fellow Zheng He director, Rong Cheng Wei.
Zheng He's acting chairman, Andrew Smith, who has spent this year trying to unravel what happened, believes the loans were designed to use the public company's cash to repay $US18.8 million borrowed by Tan from Wei in April 2010 to facilitate Zheng He's public float.
Tan might be out of reach, but Smith has sent letters of demand to his deceased estate in Malaysia.
Fascinatingly, about the same time as Smith's lawyers were drawing up those demands, Tan's widow, Catherine, used her family's 55.3 per cent shareholding in Zheng He to demand the appointment of four new directors to the board.
With no hope of beating that board challenge, Smith yesterday afternoon bowed to the inevitable and convened a board meeting, agreeing to the new appointments.
It will be interesting to see whether they decide to continue legal action against the Tans. Insider suspects investors in Zheng He can kiss that money, and probably their investments, goodbye.
Smith, though, may have bought them some insurance. Insider hears he met representatives of the Australian Securities and Investments Commission yesterday and provided them with a detailed file on all the events.
ASIC's difficulty is going to be that while Zheng He is in Australia, the business that made the loans is in China, the accused ''thief'' is now dead, and the other former director said to be involved in the suspect loans, Wei, is also in China. Insider understands neither Tan nor Wei have assets in Australia, apart from Zheng He shares.
The political thorn for ASIC's chairman, Greg Medcraft, will be that Tan was a respected leader of the Malaysian Chinese Association political party, and served as a deputy finance minister and deputy minister in the Prime Minister's office under former Malaysian strongman Dr Mahathir Mohamad. Mahathir and his wife attended the funeral.
The Zheng He loans story does not, however, end there. Rong Cheng Wei's companies, according to Smith, defaulted on all the loans - leaving Zheng He indebted to the banks last August.
Smith said that in a recent meeting with Wei ''he confirmed that, as a consequence of the defaults under the finance arrangements, the … loans had now been repaid in full''.
In Zheng He's prospectus, Wei was not only credited with playing a role in the financing of Zhouning county's public welfare system, he was awarded ''the Excellent Entrepreneur award from Zhouning county's police force from 2003 to 2006''.
Tan's widow signed an agreement last August taking responsibility for the loan defaults, according to Smith, and the deposit around that same time of 140 million yuan into Zheng He bank accounts, by two China-based companies associated with a Lin Liang, were assumed to be the product of that agreement.
In February this year, a routine audit found the cash was no longer in the company's bank accounts, having been withdrawn on the authorisation of Lin (who had been appointed chairman of Zheng He's China subsidiary).
Smith's investigation in recent weeks discovered that Lin believed his companies had only ever been lending the money to Zheng He, and had taken it back.
The deal appears to have been a little more complex than that, though, because the money was moved into Zheng He accounts near the end of each month, and out again at the beginning of the following month - meaning Zheng He's bank statements each month showed that the money was there, but in reality it was being used by Lin's companies.
Short Stay (June 8, 2012)
Robert Payne, who joined the board of the floundering Zheng He Global Capital on May 29, looks like setting a record for the briefest appearance on the board of a listed company.
Zheng He told the market late yesterday that Payne has quit - and his resignation is backdated to June 1, which means that he lasted a mere 48 hours on the board of a company that once had aspirations to be a financier to China but is now looking collapse in the face.
Insider is not wholly surprised that Payne has departed. The last time Zheng He was mentioned here was when the Malaysia-based major shareholder decided to nominate him and three others to the company's board, giving them voting control.
Their nominations had come hot on the heels of Zheng He's executive chairman, Andrew Smith, launching legal action against entities associated with that same shareholder after spending some months trying to find out why $20 million had disappeared from the company's bank accounts.
Smith fell on his directorial sword on May 30, after the new directors rolled across the boardroom border - as did two other former directors.
He had already fired himself as an executive the day before, although his termination was not due to take effect until last Friday.
Insider also hears that not long before he did leave, Smith had delivered a fat file to the corporate walloper on the results of his investigations, showing where he thought the $20 million had gone.
The question now is whether the Australian Securities and Investments Commission wants to chase an investigation through Australia, China and Malaysia.
Small and suspended from ASX but law is the law (August 3, 2012)
ZHENG He Global Capital might be a tiny company, and it has been suspended from ASX trading for nearly six months - but that does not excuse it from complying with the Corporations Act.
Yet, from what Insider can work out, it is now a fortnight since it became a two director company, and neither of those live in Australia.
For those of you who do not sleep with a copy of the legislation, Insider can tell you that Australia's company law says very clearly that a public company must have a minimum of three directors - and at least two of them must be Australian residents.
Zheng He fails on both hurdles, judging by its most recent announcements to the ASX - although with $20 million of shareholders' funds having inexplicably evaporated from the company's bank accounts in China, that may be the least of the sins committed against investors.
Local investors only know about the missing money, and its circuitous path through Chinese businessmen and the family bank accounts of Zheng He's deceased former chairman, Dato Tan Tian Hong - who was also a deputy finance minister of Malaysia - because of the efforts of former chairman Andrew Smith.
Smith tracked down how and where the $20 million went, although Zheng He's empty coffers and the fact that any litigation would require going to court in both Malaysia and China limited his efforts. He was planning to send a legal letter of demand to the Tan family when the former chairman's widow, Catherine, used her family's 55.3 per cent shareholding in Zheng He to thrust four new directors onto the board.
Rather than spend money holding an extraordinary meeting to defend their position, the existing board fell on their directorial swords, and Tan's four nominees took control.
Based on the filings of those four with the Australian Securities and Investments Commission on their appointment, Insider can only conclude that Zheng He has been in breach of the law since May 30 because only one of the men, Melbourne-based Robert Payne, lived in Australia.
Payne resigned within 48 hours, which makes Insider wonder whether Payne realised that consenting to being a director of Zheng He may not have been the smartest thing he had done.
Of the three remaining directors, two lived in Malaysia and the other in China. On July 20, one of the Malaysian directors quit, leaving two people. No explanations were given for either departure, and there was no indication that the company acknowledged it was in breach of the law and had plans to remedy the situation.
Insider finds it difficult to believe that ASIC is not aware of Zheng He's status, because the word was that former chairman Smith made a complaint to the corporate regulator before he left.
Not only that, the new board of Zheng He has said nothing about its plans for a company that has no employees, no business - but does have a theoretical $20 million claim against interests associated with its major shareholder.
Old favourites appear once more in ASX hall of shame (August 24, 2012)
Finally, one of Insider's favourite listed companies, Zheng He Global Capital, is also facing delisting for not paying fees. As noted earlier this month, Zheng He has had only two directors, neither of them Australian residents, since July - which would seem to put it in breach of a whole lot more than not paying listing fees. Maybe those two are too busy trying to recover the $20 million that shareholders thought was the company's assets, but turned out to be claimed, and banked, by the Malaysian-based family that is Zheng He's largest shareholder.
That is a shame, because if it is delisted, shareholders may never hear about how the hunt for the money is going.
Wednesday, 17 April 2013
Chinese local debt posing a large risk?
Article from Yves Smith on her blog.
"We have someone well-placed in China telling the world that its local debt is a train wreck waiting to happen, a classic Minksy Ponzi unit, but the timing of the unravelling is uncertain. And the source is an authority and not the sort one would expect to make remarks like that casually.
The Financial Times tells us the alert comes from Zhang Ke, vice chairman of the Chinese accounting association, who said his accounting firm, ShineWing, had virtually stopped signing the financial statements for bond sales by local governments. He described the debt as “out of control” with the potential to cause a bigger-than-housing-crisis level bust. But since the obligations can still be rolled, who knows when the dubious debt will fall under its own weight."
And it continues:
Local government debts soared after 2008, when Beijing loosened borrowing constraints to soften the impact of the global financial crisis. Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy.
Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999. On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable.
Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects.
Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013.
Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”
"We have someone well-placed in China telling the world that its local debt is a train wreck waiting to happen, a classic Minksy Ponzi unit, but the timing of the unravelling is uncertain. And the source is an authority and not the sort one would expect to make remarks like that casually.
The Financial Times tells us the alert comes from Zhang Ke, vice chairman of the Chinese accounting association, who said his accounting firm, ShineWing, had virtually stopped signing the financial statements for bond sales by local governments. He described the debt as “out of control” with the potential to cause a bigger-than-housing-crisis level bust. But since the obligations can still be rolled, who knows when the dubious debt will fall under its own weight."
And it continues:
Local government debts soared after 2008, when Beijing loosened borrowing constraints to soften the impact of the global financial crisis. Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy.
Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999. On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable.
Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects.
Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013.
Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”
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