Yangzijiang, open up on micro-lending
The slew of corporate failures in Wenzhou, China’s entrepreneurial hub in Zhejiang province, has sparked fears that the informal lending bubble has burst. One S-chip that has docked itself into this shadow banking sector and could potentially be pulled down by the ebbing tide is Yangzijiang Shipbuilding.
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By LYNETTE KHOO
14 October 2011
The slew of corporate failures in Wenzhou, China’s entrepreneurial hub in Zhejiang province, has sparked fears that the informal lending bubble has burst. One S-chip that has docked itself into this shadow banking sector and could potentially be pulled down by the ebbing tide is Yangzijiang Shipbuilding.
For now, the actual impact on the group remains unclear because the company has not given clear signals publicly.
Once a company engaged purely in shipbuilding and ship repairing, Yangzijiang ventured into micro-financing last year through a 51 per cent stake acquisition in Jiangsu Runyuan Rural Microfinance Co.
It has also invested 10 billion yuan (S$2 billion) into held-to-maturity products issued by Chinese banks and trust companies, which are used in the financing of Chinese corporates and entities.
Greater clarity
All of the group’s non-core operating income, including cash deposits and forex forward contracts, now account for close to half of its pre-tax profits, based on its latest quarterly results.
Given the string of corporate bankruptcies in Wenzhou and worsening business conditions, there is now a need for greater clarity on these micro-lending and investment activities.
Of particular concern is whether there are risks of default on loans issued by the micro-lending unit and any potential rise in bad debts.
Also, is there any risk of write-downs on the held-to-maturity assets arising from borrowers defaulting? Has the recent dip in the Chinese stock market affected the value of share collateral for these financial assets?
For now, little is known about the risk profile of the micro-lender, with no information on its borrowers’ sectors or geographies. It is also unclear if Yangzijiang will make further investments after its existing held-to-maturity products expire.
BT queries to Yangzijiang drew a blank. But clearly, the business environment for lending and investing has taken a turn for the worse since Yangzijiang’s foray into non-core activities such as micro-financing.
Its management has described the group’s venture into micro-lending as ‘purely opportunistic’ while its investment into held-to-maturity products was driven by the need to better manage its cash.
Since China started tightening bank credit to cool growth, many cash-rich corporates and individuals have seized the chance to lend at steep rates to small and medium-size enterprises (SMEs) in China, resulting in a grey lending market.
Lending at higher-than-official rates has proven to be very profitable. According to Societe Generale, non-core lending operations accounted for one-third of the profits of several non-banking Chinese companies in the recent half-year results.
But the latest slew of corporate failures in Wenzhou shows that the informal lending market was a ticking time bomb. Analysts had flagged that it was impossible for corporate margins to keep up with the hefty interest rates of non-banking loans, which could be as high as 70 per cent.
And such risks in China’s shadow banking industry aren’t confined to just one city. Economists are warning that the Wenzhou crisis could be the beginning of a much larger wave of corporate bankruptcies across the country.
It is unclear if Yangzijiang’s micro-lending unit is affected at all by a potential rise in loan defaults or an interest rate cap imposed by the Wenzhou government. Neither is it clear if its held-to-maturity investments have taken a hit.
No one will be any the wiser because the company has chosen to keep mum on the subject. But silence shouldn’t be the approach to adopt, especially when these non-core activities are increasingly becoming a major part of the group’s business.
While earnings contribution from the micro-lending business is not significant yet, there are signs that the group is interested in raising its exposure to micro-lending.
In addition, the group also holds a 20 per cent stake each in two Chinese venture capital funds to provide seed funding to start-ups.
Risk profile
These non-core operations have certainly changed the risk profile of the group and investors are no longer buying into a pure shipbuilding company. Greater transparency on these non-core businesses is hence required and expected of the group.
And with the informal lending market in China potentially morphing into a sub- prime crisis of its kind, it is imperative for Yangzijiang to shed some light on its lending activities. This would help shore up investors’ confidence for the counter in a market fraught with much uncertainty. It’s one area that no doubt warrants some probing at the next shareholders’ meeting.