For all its increasing financial, political military and economic clout, China is still a frontier economy when it comes to good business and investment good governance.
From the many insider dealings, leaks of official inflation data and other “secret” data, plus occasional legal actions against a string of foreigners, including Australians, to patent theft, reverse engineering of products and business ideas, and outright fraud and arrogance, Chinese business practice has it all.
But much of that pales beside the threats posed by two recent developments from China that threaten multibillion dollar losses on international corporate bonds for investors, and the huge global shipping sector.
They involve directly or indirectly Chinese government-owned companies (in the emerging shipping default scandal) and ostensibly private Chinese companies that have raised tens of billions of dollars from investors in the US and Europe, which has vanished.
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Currently there’s the emerging quasi-fraud known as Sino-Forest, a Canadian-listed Chinese tree and timber group that has all the hallmarks of multibillion dollar black hole. It was first exposed two months ago by a Canadian research house linked to a professional short seller.
For that reason, many of the claims were suspect, but Sino has been unable to rebut them, a promised investigation by the company has failed to produce a report and last week Canadian financial regulators suspended the company and eventually forced the chairman and CEO to resign.
Then yesterday, the Financial Times reported that about $US3.1 billion in bonds issued internationally by Sino-Forest had been reclassified by worried traders and were now trading on the basis of cents in the dollar rather than yield (meaning they were now trading on a liquidation basis, not going concern).
The Financial Times said in its report: “Bond investors are anticipating that Sino-Forest, the Chinese forestry group accused of fraud, will default on its $1.3 billion of debt, in what would be one of the biggest tests of the Chinese bond market in recent history.
“On Monday, $600 million worth of Sino-Forest bonds due in October 2017 were trading at 31 cents on the dollar, having plunged from 44 cents at the end of last week. At the same time, the company’s 2014 bonds were trading at 32 cents on the dollar, down from 55 cents.
“Its bond price falls bode badly for shareholders in the Toronto-listed company — which include Richard Chandler, the secretive New Zealand billionaire who acquired an 18% stake in the company last month, after its shares had plunged more than 80%.
“Distressed debt investors are trying to work out how much money they could recover from Sino-Forest in the event of default. While the company reported cash of $899 million as of June 2011, it had been spending more than $150 million each quarter.
“A further complication is that much of Sino-Forest’s cash, and most of its assets, are located on the Chinese mainland. Foreign bondholders do not have direct security over the onshore assets, and may therefore have difficulty in recovering much money if the company defaults.”
And the paper pointed out that Chinese companies have raised more than $US33 billion from international markets since the start of last year, much of it by very reputable companies, but now the subject of increasing speculation about how it has been used.
And Sino-Forest has a director named Simon Murray, a very well-connected chap who is a long time businessman in Hong Kong (who ran Hutchison Whampoa, for example) and was a director of Vodafone.
But now he is the chairman of the recently floated (in Hong Kong) Glencore, the world’s biggest commodities trader, which controls the Xstrata mining house and other companies such as Minara Nickel, Australia’s second biggest nickel producer and that is under a mop-up takeover offer from Glencore. Murray is reportedly in the sights of some investors in Sino-Forest.
And it’s just not Chinese companies in Canada that are leaving a bad smell, several Chinese companies that have used compliance listings through old corporate shells to list on Wall Street exchanges, have gone belly up or been fingered as a scam such as Longtop Financial and China Mediaexpress. No revenue, no profits and no cash, despite issuing accounts claiming to have earned all three.
Then there’s the legit Chinese companies that are pulling cowboy stunts in international markets: the most public of late is Cosco, the big state-owned shipping company, which has been badly exposed by the collapse in charter rates for huge oil and dry-bulk carriers for cargos such as iron ore and coal.
Cosco has had at least three of its ships arrested in ports in the past couple of months (other reports suggest it could be 10 or more) as the Chinese shipping giant reneges on high-cost charters struck up to two years ago with the vessel owners and attempts to cut these fees.
Bloomberg, Reuters, various shipping media outlets and The Financial Times have been reporting on this emerging stand-off for the past month. It threatens to curtail the already recessed global shipping industry.
The Financial Times reported this morning: “One of the highest-profile maritime groups embroiled in a contract dispute with China’s Cosco has rubbished the company’s claim that it is following normal commercial practice — and Moody’s has warned that the shipping dispute now threatens the creditworthiness of the dry-bulk industry as a whole.
“Cosco is withholding charter payments for ships that it chartered long-term for as much as $80,000 a day at the height of the dry-bulk shipping boom in 2008. Average spot-market rates to charter Capesize vessels — the largest class — stood at $16,716 a day on Friday. Cosco is withholding payments on one Navios Maritime Holdings ship and three belonging to Navios Maritime Partners. Both companies are based in Athens and listed in New York.” Last week, George Economou, who has 18 vessels from two companies affected, told the Financial Times he would resort to seizure of Cosco ships worldwide, if necessary, to recover forgone charter payments.”
Interestingly, the last shipper to do this while solvent was Fortescue Metals in 2008 when it reneged on shipping charters at high prices after shipping rates collapsed in 2008. Fortescue had to make a huge financial settlement of $US150 million with the ship owners and the disputes took nearly two years to settle.
Cosco’s tactics are far more threatening than Fortescue’s defaults. Fortescue is a private company, Cosco is controlled by the Chinese government, it is the country’s premier shipping group and one of the biggest shipping companies in the world (it is the 6th largest container company globally).
In the absence so far of any official statement disowning the shipping group’s moves, foreign groups have been treating it as an official attack on contracted agreements that underpin the entire shipping industry.
Cosco entered into long-term, fixed-cost charters in an attempt to control more of the movement of coal, iron ore, oil and grains to China from the West. It has proven to be a disaster. Last week the shipping giant revealed a first-half loss of $US432 million. That compared with a profit of more than $US540 million in the first half of 2010 so there’s been a near $US1 billion turnaround into the red in the 12 months, thanks to the collapse in shipping rates, especially on oil, iron ore and coal carriers, as well as container ships.
Other big global shipping companies have reported losses or sharp falls in profits for the same reasons (Neptune Orient Line of Singapore, for example), but none have taken Cosco’s cowboy moves and unilaterally reneged on charter deals with some of the world’s biggest ship owners.
As China is the biggest user of giant dry-bulk carriers (Cape-size and larger, or 200,000 tonnes or more), as well as very large oil tankers, the moves by Cosco are doubly threatening.
These giant carriers move iron ore from Australia, Brazil and India to China as well as oil from the Middle East, Asia and parts of Africa. BHP Billiton and Rio Tinto (and Fortescue) charter their own giant carriers on a short-term basis and have benefited from the collapse in charter rates in recent months. This has come at a time when spot iron ore prices are rising, not falling as many Chinese and foreign analysts had thought they would.
So the likes of BHP and Rio Tinto are making even bigger profits on their iron ore contracts with Chinese steel mills (and those in Japan and elsewhere).