Cash-strapped Chi­nese make pay­ments in lieu

The tra­di­tion is re­turn­ing amid cor­po­rate hard­ship

The Weekend Australian - - BUSINESS -

Li Xin­tong did not want one over­priced cash­mere sweater, let alone a hun­dred. But when his loan to Ji­cai came due, the in­vest­ment firm of­fered to re­pay him not in cash but in sweaters. The value of 100 cash­mere pullovers, it said, equalled his 150,000 yuan ($30,170) loan, and was thus fair com­pen­sa­tion. Mr Li (not his real name) dis­agrees.

Per­haps he should count him­self lucky. At least he did not re­ceive dozens of pack­ages of premium ham, as a trou­bled Chi­nese pig farm’s bond­hold­ers re­cently did, in lieu of in­ter­est. In an­other case, a fi­nan­cial sub­sidiary of HNA, a con­glom­er­ate that in­cludes an air­line, of­fered flight vouch­ers in­stead of cash when its clients’ in­vest­ments ma­tured.

The spate of un­ortho­dox re­pay­ments high­lights a squeeze in China’s fi­nan­cial sys­tem, which has hurt smaller com­pa­nies and non-bank lenders most. So far this year com­pa­nies have de­faulted on 135 bil­lion yuan ($27.2bn) of bonds, more than triple the pre­vi­ous an­nual record. But some firms that have been pushed to the brink are des­per­ate to avoid the ig­nominy of de­fault. So they try to per­suade in­vestors to ac­cept things that they make in lieu of at least part of what is owed.

Pay­ment in kind has a long, if not ex­actly ven­er­a­ble, tra­di­tion in China. In the 1990s, when state- owned fac­to­ries ran short of cash but had bulging in­ven­to­ries, some paid work­ers with goods, from fridges to fer­tiliser. The gov­ern­ment has tried to stamp out this prac­tice, but in tough times some com­pa­nies still re­sort to it.

In 2015 Hubei Yi­hua, a loss­mak­ing chem­i­cals man­u­fac­turer, raided its liquor cab­i­nets to of­fer al­co­hol to work­ers and sup­pli­ers in­stead of cash. Many com­pa­nies also give in-kind bonuses, such as shop­ping vouch­ers to cel­e­brate the Chi­nese New Year. Such gifts are tax­able, but firms and em­ploy­ees of­ten ne­glect to de­clare them.

Ji­cai is one of thou­sands of peer-to-peer lenders to fail this year, hit by the gov­ern­ment’s crack­down on badly man­aged shadow banks. When Mr Li tried to re­deem his in­vest­ment on its plat­form, he was of­fered just a few cents on the dol­lar up­front or the con­sign­ment of fine sweaters, which Ji­cai claimed were worth hun­dreds of dol­lars each.

It made this of­fer be­cause it is owned by Zhongyin, a gar­ment-maker, which it­self is in bad shape. Mr Li does not in­tend to ac­cept the of­fer: “Un­less you’re in the cloth­ing busi­ness, who’d want all these sweaters?”

For Chi­nese in­vestors, the les­son is clear: If un­cer­tain about a small firm’s prospects, be sure you like its prod­ucts.

If there’s no yuan, try pay­ing with premium ham

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