21 October 2018
Cosun Group founder Wu Ruilin is reportedly under investigation in China. The company recently defaulted on a private bond issue worth more than 300 million yuan. Photo: Caixin
Cosun Group founder Wu Ruilin is reportedly under investigation in China. The company recently defaulted on a private bond issue worth more than 300 million yuan. Photo: Caixin

Corporate China hasn’t had a very peaceful Christmas

Ahead of Christmas, Beijing police detained hundreds of people at three exclusive nightclubs for alleged involvement in prostitution, triggering speculation about the true motives behind the crackdown.

One of those facilities is Baoli Club, which is located in Poly Plaza, a landmark building in Chaoyang district owned by the State-run conglomerate Poly Group.

The club was suspected to have deep ties with Poly Group, given its location and the fact that the two share a common Chinese name.

So far, the club has been considered as an absolutely safe place where government officials, business elites and IT tycoons love to hang out.

In May 2010, Baoli Club was little affected when Tianshang Renjian, another prominent nightclub, was raided.

Poly has denied that it has any relationship with the club.

During the Christmas period, there was more negative news in relation to Chinese businesses.

On Boxing Day, video streaming company LeTV experienced a service disruption. Subscribers to its English Premier League programs were not able to access the service for half an hour.

LeTV claimed that there was a “technical breakdown”, but the explanation didn’t pacify some angry customers, prompting calls for refunds.

LeTV won the broadcasting rights for English Premier League in September last year in a deal worth over HK$4 billion. But recently, company founder Jia Yueting admitted that the firm is faced with a crash crunch due to overly ambitious expansions.

It’s reported that LeTV has failed to pay copyright fees in time for broadcasting the games. Which is why as a punishment, the broadcasting of six games on Monday was suspended temporarily.

Also taking place during the Christmas period was the “disappearance” of telecom tycoon Wu Ruilin.

Wu, the founder of Guangdong-based Cosun Group, was reportedly taken away by the police and is currently under probe.

Cosun had issued some private bonds and defaulted on one of them that matured in mid-December, involving more than 300 million yuan.

Earlier this week, the bond guarantor — Zheshang Property and Casualty Insurance Co. — settled the deal and repaid the money to investors.

But it is not sure yet whether Zheshang paid it out of its own pocket or it has hedged the risk through the purchase of reinsurance.

The private-bonds market has been loosely regulated in China. The products are mainly distributed to small investors, with minimum required investment as low as HK$10,000.

Typically, companies with weaker credit and limited access to institutional investors would resort to private bonds to raise funds. As the borrowers usually have lower asset quality and less favorable cash flow condition, they are forced to pay higher yields than traditional bond issuers.

Another 800 million yuan of Cosun private bonds will mature soon. Cosun most likely won’t be able to pay back the money, and the question is who will have to shoulder the debt this time.

It’s difficult to gauge the size of the private bond market in China, though some market participants have pegged the figure at over 1 trillion yuan.

Any large-scale defaults could rock the financial market and undermine investors’ confidence.

Zheshang’s prompt settlement of the defaulted Cosun bond is probably due to pressure from the government.

This article appeared in the Hong Kong Economic Journal on Dec. 29

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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