Oct 20, 2018 09:24 AM

Report Revealing Huarong Ties Rattles Some HK Shares

A number of stocks dipped in Hong Kong after an activist investor linked them to a complex web of financial dealings surrounding China Huarong Asset Management Co. Ltd., the embattled state bad-asset manager.

In an article posted online Friday, David Webb, a prominent investor and stock market analyst in Hong Kong, singled out 26 Chinese companies and financial institutions with cross-shareholdings and lending links. They include China Huarong, whose former Chairman Lai Xiaomin faces corruption charges; China’s biggest private lender, China Minsheng Bank (CMB); and companies backed by property tycoon Yao Zhenhua, chairman of Shenzhen Baoneng Group.

In the article, “The Huarong-CMB network: 26 stocks not to own,” Webb published a diagram showing the complex network linking the companies through shareholding and lending links.

Webb made no allegation against the companies, but after the article was posted, more than 10 stocks that were mentioned tumbled Friday in Hong Kong trading.

Webb is known for his 2017 report on a tangled network of 50 Hong Kong-listed companies with obscure ties that moved in concert to affect market prices, which he dubbed the “enigma network.” The report led to a market crash that wiped out $6 billion of market capitalization in the following month and the first-ever joint investigation by Hong Kong’s corruption watchdog and securities regulator into the companies.

So far, nobody has been charged with any offence, and no proceedings or other legal action has been taken against any of the listed companies involved, Webb said in the Friday post.

In his latest report, Webb pointed to CMB's listed subsidiary CMBC Capital Holdings Ltd. as a key connection between CMB and Huarong. CMB holds a 60.6% stake in CMBC Capital while Huarong-controlled unit Huarong Overseas owns 4.09%.

Webb called CMBC Capital’s stock “a bubble” as its market value totaled HK$16.94 billion Thursday while the company’s net tangible assets June 30 were HK$1 billion.

Buying power supporting CMBC Capital’s stock price has come from China Soft Power Technology Holdings Ltd., partly funded by loans from Huarong Overseas, according to the report.

Caixin was unable to reach Huarong and CMB for comment.

Webb also labeled the stocks of China First Capital Group Ltd. and its subsidiary Virscend Education Co. Ltd. as overpriced based on the gap between market and net asset values. First Capital has issued an HK$800 million convertible bond to a Huarong subsidiary and pledged shares of Virscend to CMB for loans, according to the report.

The report also shed light on lending ties between Huarong and Yao Zhenhua, chairman of Baoneng Group. Baoneng in 2016 shocked the market with a hostile takeover bid for China’s largest developer, China Vanke, with funds raised from its insurance subsidiary. But the attempt failed after a regulatory crackdown on highly leveraged investments, and Yao was banned from the insurance industry in 2017 for 10 years.

According to Webb’s report, Yao’s brother Yao Jianhui, who controls China Goldjoy Group Ltd., has borrowed heavily from Huarong.

Chinese authorities placed Huarong’s Lai under graft probe in April. Lai oversaw a rapid expansion of the bad-asset manager, which was set up in 1999 to clean up soured loans of state banks, but also steered its way into risky business endeavors and ambiguous ties with private borrowers. 

Earlier this week, Lai was expelled from the Communist Party and now faces criminal charges related to corruption and bribery. 

“This is only a partial view of the network … and doesn't begin to touch what has been going on in the mainland or in other countries,” Webb said in the report. He wrote that more scrutiny should be paid to the connections among “the Shanghai Government, its media arm Shanghai United Media, and Shanghai-listed Greenland Holdings Corp. Ltd. and their Huarong-assisted funding of various HK-listed companies.” 

Hong Kong-traded shares of Huarong dropped 0.69% Friday, and several of its units lost between 3% and 12%. CMBC Capital tumbled 4.2% while CMB closed down 0.18%.

Contact reporter Han Wei (

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