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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3 Comments so far

  1. douglas roberts dimick on April 24, 2012 5:52 am

    Hi A,

    Excellent commentary. I offer two observations…

    1. With regard to your first two comments, BX municipal government stylistics is modus operandi here in China; he is not atypical. The synthesizing of red and black mafias to overleverage public and SOE (or state owned entity) balance sheets out-does US federal government debt schemes when one considers the leasehold (versus fee simple) nature of China’s asset-backed vehicles for public and private financing.

    My oldest Chinese brother in Wuhan showed me during the first of my six year tour here how both the banking and state-central financial regimes are bankrupt… and I do mean bankrupt (like several times over).

    Bottomline: the name of the game is who can steal the most, starting with the 9 little emperors and their families at the Politburo and all the way down to mid-level managers as was once BX.

    2. Again, because for leasehold and and transparency (a la reciprocity of taxpayers and lenders), the American muni comparison is not relevant for purposes of recourse.

    Here, it is the borrower that controls the relationship. My oldest Chinese brother told me that he was jailed once for trying to collect an overdue high-interest loan that he had made to some local Communist Party government offices.

    The point? The PLA and entire public security apparatus of Communist China is vertically and horizontally integrated into the Party legions itself, so recourse is a moot point, which precludes any muni-like recourse comparisons.

    When one looks at BX with wife et al, you are looking at the cadre of the Chinese Communist Party — being a primary reason, by the way, why they are making this guy an example.

    dr

  2. Anon on April 24, 2012 1:14 pm

    The biggest theft and wealth transfer in human history is taking place with few observers being able to add two and two.
    Even the Swiss Banks will pale in comparison to the gargantuan theft taking place in some parts of the world.
    This issue was pointed out by the Morgan Stanley Chief Economist, Andy Xie, for which he was promptly fired !
    If one thinks the West has crony capitalism, wait till you see what the Easterners are doing. This is theft on altogether a different magnitude ! An entire political party looting the country hollow! The quantum of loot is mindboggling !

  3. Andre Wallin on April 24, 2012 9:32 pm

    Switch happened in SP500 today indicating a large rally immediately

    I am looking for an apprenticeship as I am a better analyst than speculator.

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