(BLOOMBERG) – Before being detained by police in Shanghai, Lo Ching was lauded as the new-age Hua Mulan, the legendary female Chinese warrior. Now the downfall of Lo – chairman and executive director of Singapore-listed Camsing Healthcare and founder, chairman and CEO of Hong Kong-listed Camsing International – has become a parable of the dangers of investing in China.
Noah Holdings Ltd, one of China’s largest wealth managers catering to high-net-worth individuals, is among the first to find out. The US-listed asset manager has filed a lawsuit against Camsing International Holding related to a 3.4 billion yuan (S$672.7 million) credit product in danger of default, according to a filing this week.
The word default, itself, isn’t so scary. After all, evaluating the risk that an obligation won’t be paid is what credit investors do every day. Nor is Camsing International’s credit product all that unusual: The underlying assets are account receivables the company expects from China’s top-tier retailers, JD.com Inc. and Suning.com Co.
Formal financing channels – such as bank loans, corporate bonds or exchange-traded asset-backed securities – aren’t readily available to smaller private enterprises in China. So while the likes of Alibaba Group Holding can regularly issue account receivables-backed securities, small businesses often use their working capital as collateral for loans from asset managers. In the case of Camsing International, Lo pledged her 62 per cent stake in the company to Noah.
The worrying part about all this is whether any money can be clawed back. JD.com and Suning said they don’t owe Noah the 3.4 billion yuan: “Camsing falsified JD.com’s business contracts,” a JD.com spokesman told Bloomberg News. Camsing International held 5.7 billion yuan in account receivables, 74.4 per cent from Suning and 23.2 per cent from JD.com at the end of 2018, Caixin reported, citing Camsing International financial documents the financial news site said it had seen.
As for those shares Lo pledged, they’re hardly worth anything now. Camsing International’s stock crashed 80.4 per cent on Monday after news of Lo’s detainment broke. That 62 per cent stake is worth just HK$340 million (S$59.3 million) now. In Singapore, Camsing Healthcare’s shares have been suspended since April 1 following a trading halt on March 22.
Noah can file as many lawsuits as it wants; the truth is its path to recovery doesn’t look good. Data on these types of shadow-credit products are slim, but reviewing defaults of exchange-traded corporate bonds, China Inc. has a lousy track record. Among the 128 issuers that have defaulted on their bond obligations since 2014, only 28 have paid back investors in full. Of the total 216 billion yuan in missed bond payments, only 31 billion yuan, or 14.5 per cent, has been repaid, according to HSBC Holdings.
Private enterprises are the worst offenders. Of the 17 state-owned enterprises that have defaulted, 41 per cent have paid investors back, according to HSBC. By comparison, just 19 per cent of the 111 private business that defaulted repaid creditors.
As I argued last week, when it comes to private businesses, no one will come to rescue lenders and minority shareholders if things go sour. While cash-strapped local governments rarely pump their fiscal dollars into failing state enterprises these days, none of them wants to see a local champion fail. Somehow municipalities will wring money from bailout funds, strategic investors or even local banks to save struggling businesses.
I’d love to laud the animal spirits of China’s private enterprises, but recent waves of corporate-governance scandals – from missing cash to potentially falsified business documents – are scaring investors. If you’re into stocks, by all means go with your heart. If you’re a credit investor, use your head instead.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.