There are so many risky loans are piling up in China that one of the country’s leading dairy companies is now securing finance leases that use its cattle as collateral.
In a communist nation like the People’s Republic of China, the way the machinery of the banking and finance system works is not quite the same as in the West. To be sure, China has patterned its newly-liberalized financial sector on Western models. However, it is still a country rife with information suppression and it only recently opened up its stock markets in Shanghai and Hong Kong. China is still in the first phases of transitioning toward a more advanced, diversified economic model.
Ironically, sometimes there are setbacks that render that model seemingly less advanced. One factor contributing to just such a regression is the mounting value of risky loans being made in China. As it stands, there is some $1.3 trillion (8.5 trillion yuan) in risky loans sloshing around the Chinese market.
Relatively recently, there were reports that it was increasingly commonplace in China for borrowers to store hundreds of pounds of copper in their garages as collateral for loans. Although a troubling and unusual sign, it made some sense given that China is the world’s #1 market for copper.
Now, however, things have gotten so far out-of-bounds that banks are actually showing a willingness to take far riskier assets as collateral. In the case of the country’s largest dairy farmer, China Huishan Dairy Holdings Co., the company’s living, breathing cows are actually being collateralized!
“It’s not very common to use cows as collateral,” Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd., told Bloomberg. “The value of a cow would fluctuate depending on milk prices and other factors, so it’s a risky asset for lenders. It would be hard to do forced selling—there’s no liquid market for a large number of cows.”
Both the volatility of the market for cattle and fluctuations in the price of milk make the firm’s 190,911 cows fairly risky assets. The finance lease contains clauses that call for aging cattle to be culled and replaced, however. This vast empire of livestock amounts to roughly 5.7 billion yuan and is spread across 78 farms around Greater China.
Borrowing against its huge herd of cattle fits in with China Huishan Dairy’s corporate strategy that has relied heavily upon stock buybacks to avoid falling with the rest of the Chinese markets. According to Bloomberg, the company bought back the equivalent of HK$1.9 billion ($249 million) worth of its own shares from April to September of last year. This was nearly two times the amount of operating revenue it made over that time. Nonetheless, these share repurchases have fueled the company’s 72% jump in share price since July. By comparison, Hong Kong’s benchmark stock index, the Hang Seng, lost 22%.
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