Hard-up firms in China use cashmere and pork to repay loans

 

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 ($ 22,000) 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 135bn yuan ($ 20bn) 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 loss-making 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.

This article appeared in the Finance and economics section of the print edition under the headline “Woolly thinking”