Chinese gov't shell firms buy cash-strapped companies for first time

Harbin Bank Co

09/01/2020 08:46

By Samuel Shen, Cheng Leng and Ryan Woo
    SHANGHAI/BEIJING, Jan 9 (Reuters) - Local government shell
companies in China bought into struggling privately run listed
firms for the first time last year, veering from their typical
remit of financing infrastructure projects to pump over $2
billion into cash-strapped businesses.
    Local government financing vehicles (LGFVs) acquired
controlling or near-dominant stakes in 11 China-listed firms,
showed Reuters calculations based on stock exchange filings.
They also bought into a handful of small, capital-starved banks.
    The stimulus comes amid central government calls to aid
struggling private-run businesses at a time when economic growth
has slowed to its weakest pace in almost 30 years.
    At the same time, the government has moved to curb LGFV
activity to stem financial risk, calling on them to operate
independently and banning local authorities from offering them
implicit guarantees.
    Buying into struggling firms, however, raises concern about
the weight of LGFVs' own debt pile which S&P Global Ratings said
was as much as $6 trillion in October 2019 - a year in which
they sold a record $430 billion worth of bonds.
    Of last year's 11 deals, the biggest was the $500 million
Jinan Urban Construction Group Co Ltd paid for 26% of textile
conglomerate Shandong Ruyi, which has racked up substantial debt
after an international luxury brand buying spree.  urn:newsml:reuters.com:*:nL8N28N0QV
    In another deal, Harbin Economic Development & Investment Co
and another government-backed asset manager bought a 48%
controlling stake in Harbin Bank Co Ltd  6138.HK , loosening the
lender's ties with embattled conglomerate Tomorrow Holdings Co
Ltd.  urn:newsml:reuters.com:*:nL4N27Y0NT
    LGFVs flourished in the aftermath of the 2008 global
financial crisis as local authorities used them to finance
infrastructure projects while skirting central government budget
limits.
    Today, some weaker LGFVs are themselves flirting with
default and not all will get a local government bailout, Ivan
Chung, head of Greater China Credit Research at Moody's said.
    "If a company has a relatively big debt problem or
operational issue, rescuing it today could lead to bigger woes
tomorrow."
    In one sign of stress, an LGFV in Inner Mongolia narrowly
missed a bond default in December, prompting calls from central
bank advisors to draw up rescue plans for LGFVs themselves.
    To minimise systemic risk, the central government should
gradually let weak businesses fail - including LGFVs - rather
than rescue them indiscriminately, said economist Chi Lo at BNP
Paribas Asset Management.
    "I believe eventually it will allow more and bigger LGFVs to
exit the system," he said.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Chinese luxury conglomerate's bonds sink as payment deadline
nears     urn:newsml:reuters.com:*:nL8N28N0QV
Harbin Bank shares rise after state takes control in deal worth
$2 bln     urn:newsml:reuters.com:*:nL4N27Y0NT
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Samuel Shen in Shanghai and Cheng Leng and Ryan
Woo in Beijing; Editing by Christopher Cushing)
 ((samuel.shen@thomsonreuters.com;  +86 21 20830018; Reuters
Messaging: samuel.shen.thomsonreuters.com@reuters.net))