Bankrupt Chinese Manufactures Lend to Real Estate Developers at Shark Loan Rates

For those of you who are not familiar with China Shark Loan Industry and its ponzi dynamics here is a short summary from The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance:

This is how this ponzi scheme works:

Local governmental officials, that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurastiction. some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in Yongkang city, in Zhe Jjiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. In li Every scheme has a ring leader who's job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.

Most of the funds that are collected in this classic ponzi finance go to local land purchases and real estate development. Part of the funds are used in order to pay back the rolling loan. The short term interest rate in this black market is very high and ranges between 20%-150% annual rate. The sources of the ponzi funds are diverse, as ordinary citizens, banks with corrupted bank officials, and state enterprises play the game.

There are a lot of listed companies in China’s A share market that are borrowing at high interest rate loans from retail investors through “ Bank Trust Products”. These “ Bank Trust Products” are packaged by Trust companies, and distributed by bank through its retail networks all over China. According to a recent report by Fitch, more than 28% of China’s credit growth derives from such products. (see more at China’s Shark Loan Ponzi Finance- Understanding China’s Shadow Banking System )

The disclosure on the side of the banks is obscure, and the promised returns are in the double digits. There are dozens of listed real estate developers in China which made public announcement for issuing “Bank trust financing products” The following are largest and significant ones:

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  Fuxing (000926)

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  Zhonghua (600675)

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  Shimao (600823)

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  Xiangjiang (600162)

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  Wanye (600641)

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  Nanguo (002305)

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  Zhejiangguangsha (600052)

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  Yunnan City Investment (600239)

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  Tianye (600807)

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  Guanchen (600067)

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  Jiulongshan (600555)

In China, domestic companies often borrow from other companies. (they can be affiliated or unaffiliated). It is a standard practice, and most of these inter-company borrowings are done in private. This loan practice is called “ Trust loan”, and is different from “trust products” or “trust investment products” sold to retail investor by the banks. The interest rates on these loans are very high, and often are more than a 15 percent annual rate. But compared to the shark loans that are carried out in private, the 10-15% annual interest rate of inter-company “trust loans” is very low.

Besides the loan shark practice carried out between China domestic SME’s, Chinese residents ,loan shark operators, there is a massive amount of ‘ inter -company shark loan trusts” that are made between often listed companies. The funds are often channeled through banks, listed companies, Trust companies in order to reach real estate developers.

Below is a list of some examples to help you understand the scale of the shadow bank practices in China. Please notice that this is an incomplete list, and it can be found in a very short internet research. Common sense tells me that the real problem is more pervasive. Public information is available in the internet since all these companies are listed companies in China.

All the following examples are loan shark carried out by listed companies in China, all these listed companies are not in the real estate business, but they are lending high interest loan to real estate projects.

1. Orient Telecommunication 600776, from 2006 to 2007, lend 70 million to real estate developers, annual rate 14%

2. Xiangyi 600830, , A state owned tobacco firm lend out 100 million with annual rate of 18% to real estate project.

3. Parent company of 600565, 000816, a private conglomerate in manufacturing sector , lend out 100 million at 2% monthly rate to loan shark operator, the loan shark operator lend out at 5.7% monthly rate. The parent company of 600565,000816 failed to pay back the bank loan due to the over expansion. Eventually, the local government stepped in to rescue the company.

4. Baida Group, 600805, a listed department store company, lent to 600208, Xinghuzhongbao, a A share listed real estate developer 100 million high interest loan, it also lent another 100 million high interest rate loan to 000537, Guangyu Group, another A share listed china real estate developer.

5. Shenkangjia 000016, a famous TV manufacturer, borrowed 300 million high interest rate loan from another listed company called Huaqiao City 00069 to develop real estate this year.

6．Yu Development 000514, the subsidiary of "Chong qing “City Development company, in Feb2009, 000514 lent out160 million shark loan with 25% interest rate, in June 09, 000514 again lent out 50 million with 30% interest rate through Chongqing International Trust Company, the loan was unpaid later.

As of June 25, 2010, a total 531 public announcements of “ Trust Loan” by china listed firms have been recorded, a 30.1% increase from last year, many of these inter -company high interest rate “ Trust loans” are going into real estate projects.

In June of 2010, another famous private company in China, Aiduo, a renowned DVD and electronic manufacturer collapsed, and the police in “Hubei” province “Shuizhou” city seized company headquarters. The company borrowed heavily from local banks and shark loan operators. The company claimed that it invested billions and developed an electronic industry park in “Shuizhou” city, in Hubei province, but it turns out the company is in deep financial, and that the purpose of the electronic industry park development was to pledge the land of the industry park to the bank to acquire a bank loan. Many so called “industry parks”, “University parks”, “culture parks”, “tourist parks”, etc. were carried out in China under similar schemes.

For the western investor, who doesn’t have acess to the Chinese or Hong Kong markets, there is an opportunity to short the largest company in China in the area of the so called “Tourist parks”, since it was one of the most remarkable areas of overinvestment in China in the last few years. The firm is listed in the Nasadaq, is called Chi na Yida, and it’s stock symbol is CNYD.