As supply chain finance thrives in China, institutional and retail investors are increasingly looking to the 1.5 trillion yuan (US$220 billion) supply chain market as an alternative asset class. Yet, the recent default case of Noah Holdings reveals the risks in the Chinese supply chain finance market.
Noah Holdings, one of China’s largest wealth managers, announced in early July that one of its credit funds managed by its subsidiary Shanghai Gopher Asset Management amounting to a 3.4 billion yuan was in danger of default. According to Noah, the product’s duration will be extended by as long as one year to ensure repayment.
The underlying assets of the product are backed by accounts payable from Beijing JD Century Trade Holdings to Camsing, a Hong Kong-listed company. JD.com, the parent company of Beijing JD Century Trade Holdings, has claimed that the business contract was fraudulent. The controlling shareholder of Camsing was recently detained by the Chinese police over this case for suspected fraudulent activity, while in the face of a large amount of losses, Noah Holdings has sued both Camsing and JD.com.
Several financial intermediaries were involved in the transaction, including asset managers and wealth managers. A lack of due diligence on the underlying assets and a less stringent regulatory framework led to the possible default of the credit product.
“It is not just a problem with the participating financial institutions. It is actually a system problem in the existing supply chain finance market,” a senior spokesperson at Noah Holdings tells The Asset. “We will diversify the investment scope of our products and not just rely on one single counterparty in our products.”
According to S&P Global Ratings, Noah's existing AUM exposure to Camsing-related supply chain financing represents around 9% of its credit fund and 2% of its total AUM. This exposure is down from a cumulative peak of product issuance of around 10 billion yuan since 2016. On July 18, S&P Global Ratings revised its outlook on Noah from stable to negative.
“We expect Noah to slow down or even shrink its private credit products. This would be a strategic change from around three years ago, when this segment was initiated and had rapid growth,” notes a rating report from S&P Global Ratings.
In a bid to further regulate the supply chain finance market, the China Banking and Insurance Regulatory Commission issued a circular on July 16 to Chinese financial institutions.
According to the circular, supply chain finance providers must be vigilant in the monitoring of borrowers' operations, logistics processes and capital flow. Lenders should verify transactions. In addition, financial institutions are encouraged to use emerging technologies such as blockchain to verify these transactions.
While banks traditionally play a major role in supply chain finance, China’s non-bank financial institutions (NBFIs) such as securities firms, asset managers and trust companies are also actively structuring supply chain finance transactions. These NBFIs are generally less rigorous in terms of due diligence and are not able to keep track of the cash flow status of the borrowers. Currently, supply chain finance is lightly regulated under China Securities Regulatory Commission, which has not yet issued any updates on supply chain finance after the recent issues.
The supply chain finance plus ABS model has been prevalent in China over the past few years, especially in the exchange markets and OTC markets, due to its efficiency in raising funds for small and medium-sized enterprises. According to CNABS, over 89.5 billion yuan in supply chain finance ABS has been issued as of the end of April, accounting for 42.3% of total issuance under the China Securities Regulatory Commission programme.