There may be no use in crying over spilled milk, but it can sure leave a nasty mess. The same is true of the sudden near-90% fall in the shares of China Huishan Dairylast Friday, an upset that’s highlighting the less-wholesome workings of China’s financial system.
Things could certainly turn sour for insurance giant Ping An, which the Financial Stability Board has designated as one of the world’s systemically important global insurers. Its banking subsidiary, Ping An Bank, is on the hook for 2.14 billion Hong Kong dollars ($276 million) it lent to an offshore entity called Champ Harvest that is majority-owned by Huishan’s chairman and which in turn owns 73% of the dairy company.
Completing the circle, Champ Harvest had pledged as collateral more than 3 billion of Huishan’s shares—equivalent to about a 25% stake. Its buying had helped keep Huishan’s stock price afloat, but after last week’s plunge, those shares are now worth just HK$1.4 billion ($180 million).
If Ping An Bank were to write off the Champ Harvest loan in full, its pretax profits could fall by 2% this year, Daiwa Capital Markets estimates—a hefty hit. The bank says it is working with other parties and Beijing to resolve the situation.
Ping An Bank’s bad-debt problem had already been growing fast, with nonperforming assets up over 40% last year and loan-impairment losses up 52%. If its thinning capital buffers fall below regulatory limits, its insurer parent Ping An could be forced to pump in money.
Ping An Bank is one of a cluster of midsize Chinese lenders that are an increasing focus of investors’ concern given their heavy reliance on wholesale funding, high loan-to-deposit ratios and exposure to China’s murky shadow-banking sector. If Ping An Bank’s lax Huishan-related lending is anything to judge by, the mood could curdle further.