China Essence

[touzi]

China Essence seems to have good connection. Er Kwong Wah (the same guy from China Sky Fibre) sits on the board and Cheah Cheng Hye from Value Partners is a substantial shareholder.

[Big Toe]

Agree with d.o.g on the lending by banks.
It is exactly loose credit that lead to the housing mess in the U.S.
Now the opposite is happening, banks are sitting on deposits and only lending to those with high credit scores.
So much so that deposits are being turned away...any deposits that are left to idle will incur costs, they rather do with less deposits,
what better way than to do that than close branches and retrench/cut operating costs at the same time?

When all the weak borrowers are weeded out/provisions being gradually reduced for past mistakes, it'll only bode well for the days ahead. With the job market showing some signs of life, I am relatively optimistic about U.S. banks as a whole. Banks plays a pivotal role in the economy, with a rational management/normalized economic conditions, it cannot help but to make 'adequate' profits.

[hyom]

In good times, managers will tell credit officers to be aggressive and lend at low rates with lenient terms. In bad times, managers will give the opposite directive - no lending except at high rates and stringent terms, or sometimes no lending at all. Thus are we condemned to this collective insanity and the resulting boom-bust economic cycle. Only a bank that is micro-managed by its owner (like UOB) can hope to sidestep these issues. But there is a limit to how large such a bank can grow, and a limit to how long such an owner will live...

This is something useful to take away. Banks which are family-owned like UOB will have better risk management practices in place to control the amount of bad loans that are made during the best of times because management interests are aligned with shareholders' .

The DBS credit team forgot the first rule of lending: only lend to people who will pay you back...

It is sad that such elementary concepts seem to have been forgotten in the rush to "modernize" and "internationalize" the bank.

Just to lift the comments out of context for the sake of discussion. With the "modernization" of some banking practices, it actually make sense for bankers not only to forget the first rule of lending but to defy it. Debt securitization packages loans into different slices and bankers sell the different slices away. It can transfer bad lending risks to ignorant, greedy customers while bankers earn big fees in the process. Why should bankers care if the borrowers cannot pay back? Not my problem anymore. My interest lies in earning $$$ by transferring the problem away

Once again, this demonstrates that without proper regulation, financial innovation tends to benefit only its innovators at the expense of its customers. There is an old book titled "Where are my customers' yachts?". The title still applies today almost a hundred years later.

[Musicwhiz]

Just to lift the comments out of context for the sake of discussion. With the "modernization" of some banking practices, it actually make sense for bankers not only to forget the first rule of lending but to defy it. Debt securitization packages loans into different slices and bankers sell the different slices away. It can transfer bad lending risks to ignorant, greedy customers while bankers earn big fees in the process. Why should bankers care if the borrowers cannot pay back? Not my problem anymore. My interest lies in earning $$$ by transferring the problem away

Yep, agree. Sounds like the sub-prime CDO problem. I think the reason banks are willing to take risks is because they either believe the risks are insignificant (i.e. borrowers will not default easily), or that they can transfer/diversify the risks away through the packaging you mentioned. I guess that's why there was a call to separate investment banking from traditional banking so that there would be no conflict of interest and that the corporate banking division would not be able to re-package loans to sell to their investment division.

Though I still believe this will NOT solve the problem as banks will somehow creatively find a way round this obstacle and somehow continue to try to re-package risk away, rather than engage in "true blue" prudent lending.

[Qiaofeng]

Just for the record, Essence has made 3 payments to DBS for its original $60mil USD loan. $10mil, $10mil and $1.5mil (most recent).

But not quite sure why the credit team in DBS agreed to lend to Essence via a unsecured loan originally...

Yup, they did some good-faith partial repayments. They probably figured they might need to raise capital again in future, and paying something looks better than paying nothing. But ultimately, they paid because they WANTED to. DBS had no recourse if they didn't pay, and still has no recourse.

As to why the loan was made to begin with, remember that the loan officers are just employees trying to get a bonus. In a bank you get a bonus for making lots of loans and thus booking lots of interest income.

If the loan goes bad later, so what - you've already collected your bonus. Nobody has a long-term incentive to make sure the loan is good, especially when staff turnover is high. You'd probably be working in a different department or even a different bank by the time the problems crop up, so who cares about loan quality?

In good times, managers will tell credit officers to be aggressive and lend at low rates with lenient terms. In bad times, managers will give the opposite directive - no lending except at high rates and stringent terms, or sometimes no lending at all. Thus are we condemned to this collective insanity and the resulting boom-bust economic cycle. Only a bank that is micro-managed by its owner (like UOB) can hope to sidestep these issues. But there is a limit to how large such a bank can grow, and a limit to how long such an owner will live...

Just out of curiousity.....
Are U still a potato lover or a potato ex-lover?


Going by what d.o.g. analyses, there seem to be a genuine (?) desire on the part of CE to pay----- since they could walk away like a lot of S-chips, which did not.


DBS
Taking the cynical view, one would find the DBS officers wanting in giving an unsecured loan to CE.
Taking a less cynical view, one might think that the DBS officers had done their homework and think that CE had a investment case that merits such a loan ( remember it was in the throes of the 2008 GFC, in July).

In my narrow knowledge of S-chips, almost none (with the exception) of CE has been able to get an offshore loan in SGD from local SG banks. Most had to resort to onshore RMB denominated loans which carries much higher rates from the likes of ABC, CCB etc (which CE also has). So why did DBS made that exception?

In fact DBS tried to syndicate and term out the loan with 2 other banks, but the Lim & Tan report casted so much doubts, the whole syndication was aborted, leading to DBS reverting to a roll over of the facility.


CBs
One other point is wrt to the CBs....
The achilles heel for most of the S-chips that got into trouble is CBs.
Negotiations failed becos:-
1) the bondholders did not budge (inexplicable in the light of d.o.g's explanation, since they will lose all)
OR
2) the majority SSHs did not wish to pay up ( they simply want to swallow up the "free" loan given the lack of punitive alternatives), given cross border issues wrt to legal jurisdictions.

Is that another factor that give some insight towards the DBS officer's judgement on the credibility of the majority SSHs?


Cross border Issues
My 1cGibberish is that SGX has an inherently flawed system; and shoulders a big part of the responsibility.
It desires to be a regional ( make it international) exchange of the highest standing. Yet, it did not seem to have sorted out cross border issues such as ability to extradite and freeze assets (i.e. the domicile mismatch/assymmetry) problems that d.o.g mentioned.
This issue does not apply to S-chips alone, it can apply to any foreign owned SGX listing (or dual listing) say from Russia, UK, Vietnam, Thailand, Indonesia, Norway, Australia etc even US ....

The ability to protect minority shareholders interests by "freezing" foreign domiciled assets and to extradite and punish foreign domiclied majority SSHs seem to have been sacrificed in SGX's big rush to regionalise/internationalise.
The fact is that we often read that the SG govt signs MOUs with provincial govts like Guangdong, Chongqing, Nanjing etc.

Why are cross border legal issues not given due attention in such MOUs, when the firms from such provinces (who register in BVI or Cayman) list on the SGX? In fact, SGX entices and targets the smaller Chinese firms that find it difficult to list in Chinese exchanges by using the loophole of a BVI or Cayman's registration; knowingly ( of the cross border issues).

For SGX to really compete with HKEX, more govt-to-govt level legal framework/structures to address cross border issues need to be set up. This is the true SG Inc model, which is lacking at the moment.

[d.o.g.]

The achilles heel for most of the S-chips that got into trouble is CBs.
Negotiations failed becos:-
1) the bondholders did not budge (inexplicable in the light of d.o.g's explanation, since they will lose all)
OR
2) the majority SSHs did not wish to pay up ( they simply want to swallow up the "free" loan given the lack of punitive alternatives), given cross border issues wrt to legal jurisdictions.

Stupid bondholders are more common than you think. Many come from the US or Europe, and they think that just because the rules are in their favour, they can bang on the table and get their money back.

Crooked promoters are more common than you think. Many view the stock market as a place to get free money. As far as they are concerned, the company still belongs to them after listing - it just has more money now, and that extra money also belongs to them.

The ability to protect minority shareholders interests by "freezing" foreign domiciled assets and to extradite and punish foreign domiclied majority SSHs seem to have been sacrificed in SGX's big rush to regionalise/internationalise.

Freezing and seizing cannot be done for a few reasons:

1. Even if the promoters put their shares with a custodian in Singapore, they can just take cash out of the company. The shares would then be worthless.

2. Requiring the cash to be held in Singapore would create tremendous inconvenience for the business operations. Only if the customers and suppliers are all international could this even be feasible i.e. only transfer enough onshore to pay local wages, utility bills etc. For pure domestic operators who buy and sell locally in China, keeping the cash in Singapore makes no sense at all.

3. Extradition treaties, if they exist at all, normally cover only severe crimes e.g. drug trafficking, weapon smuggling, genocide etc. Stealing a few million dollars doesn't count. Marcos stole billions and didn't get extradited. Why would some small fry S-chip owner who stole "only" $50m get any attention? Even the boss of Oriental Century, after confessing to The Edge in an exclusive interview, is living as a free man in China. That should tell you everything about extradition.

For SGX to really compete with HKEX, more govt-to-govt level legal framework/structures to address cross border issues need to be set up.

Would China sign an agreement with Singapore that helps SGX to compete with HKEx? No way.

[Qiaofeng]

The achilles heel for most of the S-chips that got into trouble is CBs.
Negotiations failed becos:-
1) the bondholders did not budge (inexplicable in the light of d.o.g's explanation, since they will lose all)
OR
2) the majority SSHs did not wish to pay up ( they simply want to swallow up the "free" loan given the lack of punitive alternatives), given cross border issues wrt to legal jurisdictions.

Stupid bondholders are more common than you think. Many come from the US or Europe, and they think that just because the rules are in their favour, they can bang on the table and get their money back.

Crooked promoters are more common than you think. Many view the stock market as a place to get free money. As far as they are concerned, the company still belongs to them after listing - it just has more money now, and that extra money also belongs to them.

The ability to protect minority shareholders interests by "freezing" foreign domiciled assets and to extradite and punish foreign domiclied majority SSHs seem to have been sacrificed in SGX's big rush to regionalise/internationalise.

Freezing and seizing cannot be done for a few reasons:

1. Even if the promoters put their shares with a custodian in Singapore, they can just take cash out of the company. The shares would then be worthless.

2. Requiring the cash to be held in Singapore would create tremendous inconvenience for the business operations. Only if the customers and suppliers are all international could this even be feasible i.e. only transfer enough onshore to pay local wages, utility bills etc. For pure domestic operators who buy and sell locally in China, keeping the cash in Singapore makes no sense at all.

3. Extradition treaties, if they exist at all, normally cover only severe crimes e.g. drug trafficking, weapon smuggling, genocide etc. Stealing a few million dollars doesn't count. Marcos stole billions and didn't get extradited. Why would some small fry S-chip owner who stole "only" $50m get any attention? Even the boss of Oriental Century, after confessing to The Edge in an exclusive interview, is living as a free man in China. That should tell you everything about extradition.

For SGX to really compete with HKEX, more govt-to-govt level legal framework/structures to address cross border issues need to be set up.

Would China sign an agreement with Singapore that helps SGX to compete with HKEx? No way.

D.o.g.......

1) So there is NO Way out of this conundrum?

2) For bold, I do not expect parity but it is not exactly win-lose. Any agreements that punishes fraud and wrong doing will help Chinese companies get "continued" access to funds and promotes China's own interests in terms of economic development.
SGX can serve a role. Otherwise there would not have been a tacit agreement from Beijing; all these years, to let so many foreign domiciled Chinese owned companies to list in SGX.

Why close a good source of equity funding for China owned companies?
Why not help clean up all this mess on SGX and in the US exchanges that is giving China a bad name?

3) We are in agreement. Not disagreement on the following...

Qiaofeng Wrote:
The achilles heel for most of the S-chips that got into trouble is CBs.
Negotiations failed becos:-
1) the bondholders did not budge (inexplicable in the light of d.o.g's explanation, since they will lose all)
OR
2) the majority SSHs did not wish to pay up ( they simply want to swallow up the "free" loan given the lack of punitive alternatives), given cross border issues wrt to legal jurisdictions.

d.o.g wrote:
Stupid bondholders are more common than you think. Many come from the US or Europe, and they think that just because the rules are in their favour, they can bang on the table and get their money back.

Crooked promoters are more common than you think. Many view the stock market as a place to get free money. As far as they are concerned, the company still belongs to them after listing - it just has more money now, and that extra money also belongs to them.

[d.o.g.]

So there is NO Way out of this conundrum?

Don't invest if you can't see a reason for the management to be honest.

Most of the time, with overseas companies listing in Singapore, the management has millions to gain from stealing the money and face no penalty even if they are found out. The logical outcome, therefore, is stealing.

Otherwise there would not have been a tacit agreement from Beijing; all these years, to let so many foreign domiciled Chinese owned companies to list in SGX.

Why close a good source of equity funding for China owned companies?

Chinese companies have been listing overseas for years, whether in the US, Singapore or elsewhere.

In case you haven't noticed, Chinese companies continue to be able to raise money. The investing world has China fever, it is not going to let a few scandals stop it from throwing money at Chinese companies.

Why not help clean up all this mess on SGX and in the US exchanges that is giving China a bad name?

China doesn't have a bad name. China is too important to the world for it to dare give China a bad name. The companies hit by scandal have a bad name, and that is waved away as the cost of getting in on the growth of China. These problems do not affect China's reputation at all. China has money now, and nobody badmouths the only guy in town with money. Especially not those who are broke or who depend on it to buy the stuff they make (see: US and Europe).

[hyom]

Yep, agree. Sounds like the sub-prime CDO problem. I think the reason banks are willing to take risks is because they either believe the risks are insignificant (i.e. borrowers will not default easily), or that they can transfer/diversify the risks away through the packaging you mentioned. I guess that's why there was a call to separate investment banking from traditional banking so that there would be no conflict of interest and that the corporate banking division would not be able to re-package loans to sell to their investment division.

Though I still believe this will NOT solve the problem as banks will somehow creatively find a way round this obstacle and somehow continue to try to re-package risk away, rather than engage in "true blue" prudent lending.

A more permanent solution is to introduce personal liability for the bankers the next time a similar financial crisis of 2008 happens. When buildings collapse, civil engineers get charged for criminal negligence. When planes crash, aerospace engineers get charged for criminal negligence. Incompetence and ignorance is no excuse. Why should bankers get different treatment?

Unfortunately, the reality is that in 2008, guilty bankers got golden parachutes after crashing the world financial system. Check out the severance packages of the CEOS of failed Wall Street investment banks in 2008. In 2009, Wall Street paid themselves record bonuses after taxpayers bailed them out a year ago. Small wonder the "Occupy Wall Street" movement was born in 2010.

[Qiaofeng]

So there is NO Way out of this conundrum?

Don't invest if you can't see a reason for the management to be honest.

Most of the time, with overseas companies listing in Singapore, the management has millions to gain from stealing the money and face no penalty even if they are found out. The logical outcome, therefore, is stealing.

Otherwise there would not have been a tacit agreement from Beijing; all these years, to let so many foreign domiciled Chinese owned companies to list in SGX.

Why close a good source of equity funding for China owned companies?

Chinese companies have been listing overseas for years, whether in the US, Singapore or elsewhere.

In case you haven't noticed, Chinese companies continue to be able to raise money. The investing world has China fever, it is not going to let a few scandals stop it from throwing money at Chinese companies.

Why not help clean up all this mess on SGX and in the US exchanges that is giving China a bad name?

China doesn't have a bad name. China is too important to the world for it to dare give China a bad name. The companies hit by scandal have a bad name, and that is waved away as the cost of getting in on the growth of China. These problems do not affect China's reputation at all. China has money now, and nobody badmouths the only guy in town with money. Especially not those who are broke or who depend on it to buy the stuff they make (see: US and Europe).

We differ in view here.

With the Sino Forest saga and the S-chips that went wrong, China policymakers will eventually have to address Corporate Governance, Accounting & Audit standards, Rating standards and Listing rules (internally and externally).
When the corporate governance failure besot one or two or even a handful of listed companies, the reputation of those particular companies get sullied.
But if the problem is widespread, it is systemic and the country's reputation get sullied.
They may not be ready at this stage of economic development. But the day will come.

For the same reasons, I argue that it is in SGX's interests to perk up its regulatory functions. If the problem of corporate governance besot one category or one company, investors will NOT be deterred from investing on SGX. But if the problem spreads to other categories (asset classes) and involves many companies, then SGX's long term sustainabilty will be impacted by these regulatory lapses.

It is imperative that SGX see the "Big Picture" and clean up.