New alarm bells ring over Internet finance

Updated 2016-12-29 10:59:09 Shanghai Daily

China's money markets face a bumpy transition into 2017 after a recent bond default triggered ripples of concern about the booming but largely unregulated online financial sector and the practice of regulation arbitrage.

The alarm bells sounded amid reports of a 312-million-yuan (.9 million) corporate default involving Zhao Cai Bao, a platform affiliated with e-commerce giant Alibaba.

Various counterparties are disputing who is to blame. Zheshang Property & Casualty Insurance Co, which underwrote insurance on the bonds, said on Tuesday night that it will cover the losses as part of its "social responsibility."

The default related to debt due on December 15 and December 16, involving more than 8,000 initial individual investors on Zhao Cao Bao. A total of 21,000 or more may be affected or suffer losses if more bonds issued by the same entity default.

The bonds, totaling 1.1 billion yuan, were issued by southern Chinese phone maker Cosun Group two years ago. The remaining bonds mature at the end of January, according to an announcement released on the Guangzhou Equity Exchange.

Zhao Cai Bao, whose name means "bring wealth," was one of the first online sites allowed to offer private corporate bonds to retail investors, according to Shanghai-based research firm Yingcan Group.

It formed a partnership with Guangzhou Equity Exchange and signed up with Zheshang Insurance and China Guangfa Bank to provide creditworthiness and a default buffer.

The platform, which handled more than US billion in investments since it was launched in April 2014, suffered only one previous default, the company said. That was related to a company damaged by the massive explosion at the Tianjin Port in August 2015.

The platform allows registered investors to subscribe to private bonds and then sell them to other investors on the platform as personal loans, with lower yields through a special function called "cashing." The platform generates profits from listing the bonds and each "cashing" that occurs.

Regulation arbitrage

Analysts and market insiders have raised two concerns about such investments: insufficient information disclosure and improper customer targets.

The risks also exist on other similar bond-distribution platforms that don't distinguish clearly between high-yield bond products and other low-risk, fixed-income wealth management products sold online.

"The risks of such financial products are high," said Liu Dongliang, a senior analyst at China Merchants Bank. "You shouldn't sell bonds issued by small companies with no ratings to just any individual investor."

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