Jack Ma Site With High-Yield Debt a Click Away Fuels China Risks

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Billionaire Jack Ma has faced criticism about the quality of goods on his e-commerce sites. Now his push into Internet finance is raising red flags as he puts risky bonds a few clicks away from China’s 668 million netizens.

Ma’s Zhao Cai Bao, a platform that lets small businesses and individuals borrow from investors, has overseen 252 billion yuan ($39.4 billion) of financial product sales since starting last year. Recent offerings: unrated bonds from a hotel operator in Anhui province and investment firms set up last year in a Shenzhen financial zone still under construction. None of the prospectuses online provide revenues, profit, assets or debt.

“The risks of such financial products are high,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “You shouldn’t sell bonds issued by small companies with no ratings to just any individual investor.”

President Xi Jinping must balance vows to expand financing for small companies with steps to protect individual investors, whose use of Internet finance sites for margin loans contributed to a $4 trillion stock rout. Default risks have also mounted in the nation’s private junk bond market, started in 2012. A forklift maker, a leather producer and a textiles company missed payments this year.

Investor Protections

“Zhao Cai Bao places protection of investors’ interests as its top priority,” according to an e-mailed statement to Bloomberg from Ant Financial Services Group, which operates the platform.

More firms are facing repayment troubles as Asia’s largest economy expands at the slowest pace in two decades. Funding is getting harder to obtain with aggregate financing slumping to 718.8 billion yuan in July from 1.86 trillion yuan in June.

Ma is tapping small enterprises’ demand for cash to spur growth in his business empire as the cooling economy hurts e-commerce giant Alibaba Group Holding Ltd. The company, which Ma co-founded, posted its slowest sales growth in at least three years this week.

‘Bring Wealth’

Zhao Cai Bao, whose name means “bring wealth,” is the first and only site on which private bonds can be offered in China to retail investors, according to research firm Yingcan Group. Notes sold by small unrated firms are typically called speculative grade, or junk, in global credit markets.

The platform touts zero defaults among the wealth management products it helps distribute including bonds, for which it partners with local exchanges.

The exchanges have their own way of managing information disclosure, said Yang Xinyun, a spokeswoman at Ant Financial.

“Zhao Cai Bao has higher requirements for credit enhancement institutions,” according to the Ant Financial statement. “Insurance companies’ solvency ratio must be more than 150 percent and guarantee companies must be rated AA+ or above and be controlled by state-owned companies. The term ‘junk bond’ is completely groundless.”

Regulators banned individuals from buying privately placed notes overseen by the China Securities Regulatory Commission in May. The rule doesn’t apply to the bonds sold on Zhao Cai Bao in cooperation with local exchanges because they are regulated by different regional financial authorities, said Shi Lei, head of fixed income research at Ping An Securities Co. in Beijing.

Pitfalls

Guarantees can’t prevent defaults and the lack of disclosure hides potential pitfalls, according to Xu Zhipeng, the Beijing-based president of Dagong Credit Data Co., a subsidiary of one of China’s biggest rating assessors.

“If an Internet finance platform doesn’t fully disclose the proceeds’ usage or disclose all investment risks, and if we see such an act suspected of violating regulatory rules, credit risks will be very big,” Xu said.

“All our partners are regulated by related financial regulators,” according to the Ant Financial statement. “If these institutions violate certain rules, Zhao Cai Bao will stop cooperating with them and push regulators to reform them.”

The 238-room hotel in Anhui sold 100 million yuan of private bonds to yield 6.6 percent in an offering that ended this week. The securities are guaranteed by Sinosafe General Insurance Company Ltd. The insurer is among China’s 10 biggest by premiums, according to Guangdong Equity Exchange, which partners with Zhao Cai Bao on offerings.

“Don’t worry, go ahead and buy!” reads a post in a question and answer segment with the exchange, carried on Zhao Cai Bao’s site.

Shenzhen Daji Asset Management Co., one of the investment firms in the Qianhai economic zone that sold bonds through the site, issued 150 million yuan of 6.7 percent notes this month.

The finance industry’s watch dogs have yet to catch up with online distribution of risky products such as private bonds, according to Yingcan.

“Regulators are caught in an awkward position because on the one hand they want to be broadening financing channels for small companies, but on the other they also want to protect retail investors,” said Wei Hou, a senior equity analyst at Sanford C. Bernstein & Co. in Hong Kong. “Once we see defaults, we will see more strict regulation.”

— With assistance by Lianting Tu, and Judy Chen

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