Major Tian Authors

China Roundup: Metal-financing Scandal Deepens; FTZ Interest Rate Uncapped; And Fosun’s stake in US Film Studio

June 27, 2014

The week that was: metal-financing fraud puts small traders in risks; forex interest rate liberation expands in Shanghai; Xunlei files for IPO; and Fosun buys into US film studio.

Missing stockpiles of metals used as collateral to secure bank loans at China’s third largest port has caused domestic and international lenders to tighten their commodity financing operations, according to Reuters.

Earlier this month, authorities launched a probe into fraudulent practices at Qing Dao port, which involves using fake warehouse receipts from the port’s bonded zone to trick banks into metal financing deals. A seemingly unrelated investigation of 25 gold processors by China’s National Audit Office indicated that as much as $15.2 billion of their loans are tied to “improper” financing deals, the Wall Street Journal reported this week.

On Thursday, Standard Chartered said that the size of its business at the Qing Dao port was about $250 million–one of the first banks to disclose such information, according to Reuters. The report also said that by Goldman Sachs’ estimate, commodity-backed loans account for as much as $160 billion, in other words, 30% of China’s short-term foreign-exchange borrowing.

While large state-owned enterprises dominate the business, thousands of smaller commodity traders are the ones who are now at risk, as western banks are introducing stricter requirements for financing, which might trigger series of loan defaults.

But western banks like Standard Chartered, HSBC and BNP Paribas are not backing out of the lucrative commodity financing business, as foreign lenders are prohibited from most of the domestic loans market. The demand for such deals may also remain high because domestic traders can take in cheap foreign exchange to invest in China’s high-yielding (but risky) financial instruments.

Once a privilege for some of China’s largest state-owned companies, issuing guaranteed bonds to oversea markets have become more accessible for other Chinese companies.

On Wednesday, property developer Greenland became the first company that has sold $1 billion of guaranteed bonds to Asian and European investors since a rule change on June 1. Prior to that date, companies must have approval from the State Administration of Foreign Exchange (SAFE) to issue such bonds; now they only have to inform the regulator.

Bryan Collins from Fidelity told the Wall Street Journal that the new rule will lower financing costs for Chinese companies and better protect their oversea investors, who, due to the country’s strict capital flow restrictions, face a lower priority if a onshore borrower defaults. Last year, China’s then solar giant Suntech Power Holdings went into bankruptcy, causing more harm to its US investors as they ranked behind domestic creditors in the liquidation process, according to the Journal.

Greenland is set to pay a 5.875% yield for its 10-year bond issuance, much lower than the 6.5% yield that another property developer Wanda Group has to pay. Wanda offered its 10-year bond through its offshore unit in January before the regulatory change.

A trial program that eliminated the interest rate cap for foreign exchange deposits in the Shanghai Free Trade Zone has been expanded to the whole city, according to the South China Morning Post.

People’s Bank of China (PBOC) announced on early Friday that banks based in Shanghai would be allowed to set rates for deposits smaller than $3 million—a move that showcased the central bank’s determination to reform the country’s interest rate system. The announcement means that now the interest rate of foreign exchange deposits is fully liberalized in Shanghai, as rates of larger accounts ($3 million and more) are already determined by the market.

A positive development toward a market-driven interest rate scheme, analysts say that the progress is only incremental because foreign currency deposits only account for 3% of China’s total deposits. In additional, about 14% of mainland’s foreign exchange deposits are made in Shanghai.

A household name in China for almost a decade, Chinese internet company Xunlei finally tapped into the capital market this week. Without much fanfare in the international media, the Shenzhen-based firm started trading on NASDAQ on Tuesday with an initial price of $12, raising about $87.8 million.

Originally a download accelerator company, Xunlei canceled its IPO in 2011 due to concerns that its software facilitated online piracy, according to Tech In Asia. In recent years, the company has excluded a large amount of pirated resources from its search platform and expanded into the online streaming business, providing users with legally acquired content, such as movies and TV shows. The company also rolled out a media player client, available on PCs, mobile devices and smart TVs, as portals to access its online content.

In March, the investment arm of Xiaomi, one of China’s most popular smartphone companies, picked up a 27.2% stake in Xunlei for about $200 million, according to the Chinese media. Tech observers believe that Xiaomi can integrate Xunlei’s download and content services into its operating systems on both smartphones and TVs.

Xunlei’s stock, traded under XNET, opened at $14.21 on the first day and closed at $15.14 on Thursday.

The latest Chinese conglomerate interested in the entertainment business, Fosun International said this week that it would invest in an American film production company called Studio 8.

According to the Wall Street Journal, the studio is founded by Jeff Robinov, former president of motion pictures at Warner Brothers. Fosun didn’t disclose details of the investment plan, but said that the studio will make about five movies a year.

Chinese movie producer Huayi Brothers had said that it planned to invest between $120 million and $150 million in Robinov’s firm. Huayi told the Journal that the negotiation is still on, while another source said that Fosun will be Studio 8’s main partner in China.

Fosun has operations in various industries including real estate, pharmaceuticals, insurance and mining. Its move into filmmaking comes at a time when multiple large Chinese corporations, including Wanda Group, Baidu and Alibaba, are making big bets on China’s $3.6 billion movie market.

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