Apr

23

 There are some intriguing financial aspects of the Bo Xilai case.

1. Bo Xilai racked up $26bn USD of debt while he was mayor of Chongqing. He supposedly ran the city's budget at 150 percent of revenues - *net of *the massive "sing red smash black" campaign which looted billions of private assets from the city. He is accused of moving $1.3bn overseas just for himself, most of which came during his Chongqing tenure.

2. Bo was definitely at the gangsterist extreme in terms of how violent he was (he and his wife are now accused of nine murders between them, and massive use of torture in Chongqing. These reports did not all suddenly emerge post-scandal to humiliate him - the FT and others have been running articles on the subject for months.) However, Bo was able to do this with a very large amount of protection within the Chinese government for a very long period of time, in both Dalian and Chongqing. None of Chongqing's debt was classified as at-risk. (In fairness to the PRC, you could make an identical argument against the one-third-ish of American muni bonds which aren't backed by a specific revenue stream like a toll road or utility fees
…)

Chinese people, imho, have known that stuff like this has been going on for a very long period of time (at nowhere near this level of organization or sophistication, however). I think this is a huge driver in Chinese capital flight - rich Chinese people hear scattered stories of insane corruption (well beyond any ethical pale) and simply do not feel safe at all, and export capital at a massive rate. If the best-informed insiders are selling so much stock in PRC Inc, why should anybody else be buying?

3. Bo Xilai's close business crony, Xu Ming, was president of the Dalian Shide conglomerate. He has vanished in PRC detention for a month and his business empire is unraveling.

According to the dissident site Boxun that has been leading the news cycle on this whole scandal, Dalian Shide's core business - petrochemicals manufacture - has been unprofitable for a very long period of time. The stock-speculation side of the business has been successful, and the conglomerate also engaged in a lot of land permit arbitrage (using the commercial nature of its business, plus close government connections, to gain land and land permits very cheaply. The overall financial status of the conglomerate is very murky, but appears to have required enormous amounts of debt in order to stay functional, and the debt recall has blown the firm up.

38 lenders had exposure to Dalian Shide. Before this scandal occurred, not a single loan to DLSD was classified as non-performing, even though many of the loans had no realistic prospect of being paid back. imo, this is a blunt example of why NPLs in the PRC are massively understated.

4. Even before the Bo blowup, DLSD's Hong Kong subsidiary, Gaoden, was trying very hard to access liquidity thru HSBC, RBS, and others in Hong Kong. So the house of cards was in some trouble even before its political risk premium exploded.


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