Bankruptcy threat for Hitic
Beijing may close a Hainan trust firm despite strong hints by Premier Zhu Rongji more than a year ago that there would be no more bankruptcies of financial institutions.
Central bank governor Dai Xianglong said the Hainan International Trust and Investment Corp (Hitic), which recently missed a payment on a 14.5 billion yen (about HK$1.04 billion) Samurai bond, could be forced into bankruptcy proceedings if it failed to reach a deal with creditors.
'A small number of trust and investment firms will be closed after rectification and the repayment of this part of international debt should be subject to consultations between creditors and debtors,' Mr Dai said.
'If the negotiations fail, after applying for central bank approval, they can go through the bankruptcy procedure in accordance with the law.
'I suspect Hitic will be closed and the settlement of their debts should be carried out in accordance with the principles I mentioned.' The apparent reversal of Beijing's policy will create friction with the Japanese creditor banks and individual investors who bought Hitic's bonds.
It also signals the lengthy campaign to clean up the troubled trust sector has made little progress and further casualties can be expected.
Mr Zhu, stung by criticism over Beijing's handling of the Guangdong International Trust and Investment Corp (Gitic) case last year, had said the mainland might not turn to the bankruptcy courts for other troubled financial institutions. The central bank ordered the closure of Gitic, the flagship financing arm of Guangdong province, in October 1998 for its inability to pay its debts.
The landmark decision highlighted deep-seated financial problems among the mainland's trust and investment firms, sparking a credit squeeze by foreign lenders.
The trust sector remains mired in severe financial trouble but authorities have shied away from using the little tested bankruptcy law when foreign creditors have been involved.
Gitic filed for bankruptcy in January last year with US$4.7 billion of liabilities.
Foreign creditors were caught off guard by Beijing's unwillingness to bail out the politically well-connected company, which allowed the biggest bankruptcy filing on the mainland since the communists seized power in 1949. The case is still staggering through the courts.
Foreign bankers said if Hitic, with registered foreign liabilities of about US$370 million, went into bankruptcy it would not have a devastating impact on foreign lending to the mainland.
'China will be able to borrow and so will multinationals in China,' said a foreign banker. 'But the Itics are dead. No one will lend to them anyway.' While Mr Dai promised that the interests of all creditors would be protected, foreign bank creditors said there was little they could do in the Hitic case.
'We have very little leverage,' one bank spokesman said, adding that they were at the mercy of Beijing.
Hitic was supposed to make an interest payment on its 1994 bond on June 26. Under the terms of the bond, the trust was technically in default if the interest payment was not made as of midnight on July 10.
Payment agents Sumitomo Bank and Shinsei Bank said last Thursday the trust had delayed payment.
Mainland officials had said the Hainan provincial government had set up a clearing institution to pave the way for a restructuring of Hitic. The officials did not say whether the trust would meet its obligations.
The mainland has been trying to consolidate the trust sector, which once had more than 200 companies.
Authorities said recently they were shutting three small trusts in Hubei province and suspending business at a dozen trust firms in Guangdong province.
Authorities in Hubei province plan to auction non-tradable legal person shares of Hubei Xingfu (Group) Industry to pay debts owed by Hubei International Trust and Investment Corp. The Hubei trust company, a major shareholder in the Shanghai-listed garment maker, was unable to repay debt owed to Gitic, according to the official media.
