What A Farce! A $45 Million Corporate Bond Sold Through Alibaba-Backed Weath Management Platform Went Default

摘要: While Ant Financial and other relevant parties are shrinking their own responsibilities and blaming others, who can protect the legitimate rights and interests of ordinary investors? As economy growth slows down, corporate debt risk will also increase. Yet, to contribute to an open, transparent and honest financial investment environment in China, internet finance platforms should play a proper role.

(Chinese Version)

It was reported that Zhao Cai Bao, an Alibaba-backed online wealth management platform, had turned bad private bond into public financial product, which was then packaged into personal debt product after rounds of transfer, thus creating a bad debt of over 300 million RMB (around $45 million).

If true, this might be the biggest scandal in Chinese tech & finance industry, since it’s not simply an honor crisis, but rather exposes Ant Financial’s own problems, such as the lack of proper warning, incomplete information disclosure and misleading sales, etc.

Summary of facts

Above all, let’s review how the scandal broke out:

On December 20th, Ant Financial’s Zhao Cai Bao announced that two COSUN Group units, Huizhou Cosun Telecommunication Industry Co., Ltd and Huizhou Cosun Telecommunications Industry Co. Ltd issued private bonds through them in 2014 but failed to pay off the principal to investors as scheduled due to cash flow difficulties.

After 312 million yuan ($45 million) worth of high-yielding private bonds went default, investors of personal debt products were also informed that their repayment on bond was defaulted.

According to Zhao Cai Bao, investors could underwrite an amount of at least 10,000 RMB private bond from COSUN. After a certain period of time, investors could “exit” through Zhao Cai Bao’s "Liquification" function and turn their “private bond” into "personal loan". However, since COSUN’s private bond is still the base bond, a new debt relationship is formed between original bond holders and personal debt investors.

Both companies are subsidiaries of Cosun Group, a conglomerate engaged in several industries from telecoms to mining. The bond was registered at Guangdong Equity Exchange, with Wu Ruilin, chairman of COSUN Group, as the guarantor.

Apart from Wu, Zheshang Property and Casualty Insurance is another guarantor for the bond, while Zhong’an Insurance is the credit enhancement guarantor.

After the scandal broke out, huge discussion was aroused over if Zhao Cai Bao had broken any rule and if its personal debt product was part of its P2P business?

Is it P2P product, in nature?

According to 01Caijing, Tan Hong, a lawyer at JT&N and head of its internet finance project, believed that Zhao Cai Bao’s personal debt and corporate debt product, in nature, can be regarded as part of its P2P business, and thus should be regulated accordingly. Chen Yunfeng, a senior partner at Zhonglun W&D and director of Internet Finance Special Committee, further pointed out that since a new form of relationship is formed between personal debt investors and original bond holders, these products can be regarded as part of P2P business.

In addition, Chen maintained that Zhao Cai Bao might have broken Article 10 (7), (8) of Interim Measures for the Management of Business Activities of Intermediary Organizations of Internet Lending Information.

On August 24th, 2016, China Banking Regulatory Commission (CBRC), together with a couple other ministries and departments, issued Interim Measures for the Management of Business Activities of Intermediary Organizations of Internet Lending Information, which stipulated that behavior such as (7) to raise fund through selling financial management and financial products voluntarily and sell banks’ financial management, brokerage capital management, bond, insurance or trust products on commission; (8) to carry out asset securitization business or to achieve transfer of debt through packaged assets, securitization assets, trust assets, fund shares, etc. are all illegal.

Who’s to blame?

While Zheshang Property and Casualty Insurance stated that Guangdong Equity Exchange failed to provide complete files and it had asked for complete files, Zhong’an Insurance stated that Zheshang Property and Casualty Insurance had initiated the claim process, and that it would follow up on the matter.

As the platform that “issued” the “counterfeit” bond, Zhao Cai Bao stated that it was merely an open financial information service platform, while professional organizations such as banks and insurance companies are the ones who issued these products. After all, the bond had also received credit enhancement from insurance companies. Zhao Cai Bond also stated that it had been reviewing the certificate of all relevant parties to “clarify” the right and responsibilities of different parties.

Obviously, they are all trying to blame others, though Zhao Cai Bao issued another statement later and stated that investors’ rights and interests were protected by law and they could do the following things before Zhao Cai Bao received any response from the above mentioned other parties.

  • Ask Huizhou Cosun Telecommunication Industry Co., Ltd and Huizhou Cosun Telecommunications Industry Co. Ltd to repay both principal and interest;
  • Ask Zheshang Property and Casualty Insurance to assume its insurance liability;
  • Ask Wu Ruilin, chairman of COSUN Group and the guarantor of the bond, to bear joint and liabilities;
  • Ask Guangdong Equity Exchange to urge all parties to ensure the legitimate rights and interests of investors.

However, Zhao Cai Bao failed to mention its own liability. When we go through Zhao Cai Bao’s official website, we find no trace of measures to be taken in case of default products in its introduction to its business, warning as well as debt agreement.

On December 23rd, TMTpost got in touch with Ant Financial’s PR personnel and asked for response to the following questions:

  • Are there 300 million of bad debt, indeed?
  • If so, are they high-risk private bonds?
  • How can private bonds be “disguised” as “personal financial products”?
  • Why didn’t Ant Financial undertake its own responsibility in case of bond default? Can Ant Financial define the responsibilities of all relevant parties?

However, we’ve received no response as of press time. In nature, I believe the fundamental reason for the scandal is: Zhao Cai Bao disguised private bond into “personal financial products” and tricked investors into believing that they are fixed financial product just like fixed deposit, so that investors might feel rest assured to purchase these financial products.

However, private bonds shouldn’t have been packaged and disguised into personal financial products and then sold to ordinary investors, since it’s hard for them to figure out the real structure of the product. After all, most investors used to believe that financial products provided in Zhao Cai Bao are fixed financial products and have been verified by Ant Financial.

Two years ago, a colleague of mine at TMTpost was also a loyal user of Zhao Cai Bao, and also purchased one of its financial products. However, the product was soon withdrawn from the platform and Zhao Cai Bao began to provide mainly corporate debt products. Aware of his risk tolerance ability, he decided to stop conducting financial investment through Zhao Cai Bao.

So what suggestions do I have for rational investors?

On the one hand, the real economy isn’t developing well right not, and many mid and small-sized companies are on the verge of bankruptcy. Therefore, few companies could afford to pay off the interest due to low revenue rate. In other words, it is too risky to invest in corporate debt products;

On the other hand, Zhao Cai Bao disclosed so little information to investors, so many investors might not know clearly what kind of products they are investing in.

An insider of Ant Financial’s relevant business once told TMTpost that head of Ant Fortune sued to told him this September that there wasn’t P2P business at Ant Financial. However, after the scandal broke out, he voiced his anger to TMTpost, saying that “Ant Financial is telling an outright lie”.

While Ant Financial and other relevant parties are shrinking their own responsibilities and blaming others, who can protect the legitimate rights and interests of ordinary investors? As economy growth slows down, corporate debt risk will also increase. Yet, to contribute to an open, transparent and honest financial investment environment in China, internet finance platforms should play a proper role.

……………………………

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[The article is published and edited with authorization from the author @Sun Cheng, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.

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