China’s JPMorgan wannabe turned into a $34bn debt risk

Bloomberg

It was supposed to be China’s answer to JPMorgan Chase & Co. But less than five years after China Minsheng Investment Group Corp. (CMIG) outlined plans to become a financial colossus, the company has instead turned into a symbol of the turmoil sweeping China’s once-vaunted private sector. After shocking investors with a missed bond payment last month, CMIG has been scrambling for cash to avoid becoming one of the nation’s biggest-ever defaulters.
The company’s liquidity crunch, caused by what analysts describe as a combination of mismanagement and tighter lending conditions in China, underscores a sometimes overlooked risk to the global economy in the era of Trump, Brexit and trade wars. As China reins in the shadow-banking system that fed its private sector with cheap credit for more than half a decade, companies that were meant to be pillars of the nation’s growth miracle are proving surprisingly fragile.
“CMIG is not an isolated case,’’ said Fan Wei, vice general manager of the fixed-income department at Shenwan Hongyuan Securities Co. “Many Chinese companies face declining investment returns and refinancing difficulties that have plunged them into debt woes.’’
So far, Chinese policy makers have managed to clean up some of the nation’s worst financial excesses without triggering a panic. After the initial shock of CMIG’s missed payment, investors in the country’s $12 trillion bond market have mostly kept their cool. Many expect the company to eventually make creditors whole.
A public relations official at CMIG, which had 232 billion yuan ($34 billion) of total liabilities at the end of June, said that the company will make its overdue bond payment, without providing further details. China’s government has stepped in to “deal’’ with CMIG’s debt problem, the 21st Century Business Herald reported.
No matter how the situation unfolds, analysts say China’s record string of defaults in 2018 is far from over. The risk is that investors sharply curtail funding to non-state borrowers, which represent more than 60% of annual output and 80% of employment in the world’s second-largest economy.
CMIG shows how rapidly sentiment can turn. Founded in 2014, the company is the brainchild of Dong Wenbiao, the former chairman of China’s largest non-state bank who’s known as the “godfather’’ of the nation’s private sector. Billing CMIG as Chinese version of JPMorgan, Dong convinced 59 non-state companies to join forces as the company’s founding shareholders. He even won an endorsement from Chinese Premier Li Keqiang.
CMIG expanded quickly into industries spanning finance, real estate, health care, aviation and energy. Like HNA Group Co. and other non-state conglomerates that have run into cash shortages in recent years, the company often financed itself with short-term debt.
With a record 5.9 trillion yuan of debt coming due in 2019, including 33.6 billion yuan from CMIG, the question is whether China’s non-state companies can convince investors to stick with them. It won’t be easy, said Lv Pin, a fixed-income analyst at Citic Securities Co.

Its total obligations more than doubled in less than four years, while cash holdings amounted to just 1 percent of liabilities as of June, according to Shanghai Brilliance Credit Rating & Investor Service Co. At the same time, CMIG’s investments struggled: the company said in a December bond document that “not all of them have achieved profitability.’’ Squeezed by the shadow-banking crackdown and China’s deepest economic slowdown since 2009, CMIG failed to pay on time when a 3 billion yuan note matured on Jan. 29.
“CMIG’s business model was flawed even with the very capable Dong Wenbiao at the helm,’’ said Zhou Dewen, deputy head of the China Association of Small and Medium Enterprises, who has studied private businesses for more than three decades.
Calls to Dong, who retired as CMIG chairman last year, went unanswered. The People’s Bank of China and the Shanghai government didn’t immediately respond to faxed requests for comment.
Investors are watching CMIG closely for clues on how Chinese authorities respond to the prospect of a major private-sector default. While policy makers have been trying to avoid the moral hazard associated with government-orchestrated bailouts, they face growing pressure to prop up struggling businesses as the economy slows and China’s trade spat with U.S. President Donald Trump rumbles on. Over the past few months, Chinese leaders have announced a flood of policies to help reduce private sector costs and make financing more available.
With a record 5.9 trillion yuan of debt coming due in 2019, including 33.6 billion yuan from CMIG, the question is whether China’s non-state companies can convince investors to stick with them. It won’t be easy, said Lv Pin, a fixed-income analyst at Citic Securities Co.
“Investor appetite for private sector debt has hit rock bottom,” Lv said. “Many institutions are avoiding the private sector all the together. Investors should be very cautious toward those issuers that expanded debt aggressively.”