Worries are increasing over financing in China’s debt load, with the state-owned banking sector facing a wave of new bad loans and government once again allowing companies to pledge their shares as collateral against borrowings.
Guangdong-based Li Yang Aquatic, a producer of aquaculture feed and antibiotics, has announced its chairman and controlling shareholder, Ma Jia Hao, recently pledged five million shares against a new bank loan from the Bank of China. The pledge is effective to 2025 and replaces a similar arrangement the company has had with the Shanghai-based Pudong Development Bank, which was based on a pledge of 1.3 million shares in Li Yang, which is listed on China’s enterprise board for smaller-cap, high-growth firms.
The company, which sells feed, medicines, and seedlings through more than 200 stores in the key southern Chinese shrimp production region of Guangdong, hasn’t detailed the scale of borrowings, but high leverage has been a feature of the firm’s operations.
The new share pledge means that 31 percent of Li Yang’s shares are now pledged against loans. The practice of pledging shares by listed companies was sharply curtailed by the government last year, when regulators warned it posed a threat to the stability of the stock market. With the change in stance, it appears the government is placing a larger priority on the survival of the country’s corporate sector. A collapse in share prices, however, can trigger banks to call in their loans, which would be catastrophic for Li Yang.
High debt levels have been a feature of the Chinese corporate sector, with the books of leading listed seafood firms reflecting that trend. And fiscal watchdogs expressed concern this week after the central government signaled to the China Banking Regulatory Commission that it’s allowed to mark bad loans as “performing” in order to help companies get through the current coronavirus-related financial crisis.
Corporate lenders and distressed asset vulture funds have been eyeing Chinese corporate debt for signs of default, two Beijing-based investment bankers explained to SeafoodSource, who discussed the matter on the condition of anonymity. They pointed to an international dimension, given the amount of dollar debt owed by some Chinese conglomerates, particularly in the real estate sector. One sign noted by the bankers is Fujian-based Tahoe Investment Group’s struggles to refinance its past-due dollar bond repayments. The company’s demise be a blow to China’s seafood sector, as it is a major seller of biomarine pharmaceuticals, a valuable market for seafood byproducts.
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