Investors in Chinese companies have a new valuation problem. The most important asset they need to appraise is political capital. But it isn't on the balance sheet and doesn't show up in the usual places. Minsheng Bank and Kaisa Group are two companies in need of a top-up, and there's little shareholders can do to help.
Financial capital can come easily enough. Developer Kaisa just raised 2.4 billion yuan ($381 million) by selling properties to rival Sunac. That's helpful, but doesn't obviously solve its wider problem: a local government has frozen sales on some of its property projects. Its chairman, vice-chairman, chief executive and finance director have all resigned since December, for no clear reason.
China Minsheng Bank has a similar people problem. The president of the country's largest private-sector lender handed in his resignation on January 30. Mao Xiaofeng was a rising star, equivalent to the chief executive at a Western bank. Minsheng cited personal reasons, and said Mao's situation didn't affect its operations. Still, all the resignations come at a time when China's government is stamping on graft. Real estate and finance are sectors where misbehaviour has historically sprouted.
The spread of graft probes to private companies is a worrying trend. These businesses must earn state support rather than getting it implicitly, so individuals matter. Lenders often insist that key executives or founders stay in place, as happened at Kaisa. A sudden departure can undermine a company's finances.
Due diligence is of limited help. Mao came from the Communist Youth League, whose alumni include former President Hu Jintao. Now that Hu's former aide Ling Jihua is under investigation for graft, an association that might once have comforted investors may now be a liability. That's the other problem with political capital: the more investors know, the harder it is to value.
Financial capital can come easily enough. Developer Kaisa just raised 2.4 billion yuan ($381 million) by selling properties to rival Sunac. That's helpful, but doesn't obviously solve its wider problem: a local government has frozen sales on some of its property projects. Its chairman, vice-chairman, chief executive and finance director have all resigned since December, for no clear reason.
China Minsheng Bank has a similar people problem. The president of the country's largest private-sector lender handed in his resignation on January 30. Mao Xiaofeng was a rising star, equivalent to the chief executive at a Western bank. Minsheng cited personal reasons, and said Mao's situation didn't affect its operations. Still, all the resignations come at a time when China's government is stamping on graft. Real estate and finance are sectors where misbehaviour has historically sprouted.
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State-owned company bosses can come and go without much change beneath. China Resources, Agricultural Bank of China, Sinopec and China Southern Airlines have all lost senior executives amid corruption probes recently. Though Minsheng is private, banking is highly regulated so investors may notice little difference. Even after Mao's departure, Minsheng's shares remain over 40 per cent above their level in November.
The spread of graft probes to private companies is a worrying trend. These businesses must earn state support rather than getting it implicitly, so individuals matter. Lenders often insist that key executives or founders stay in place, as happened at Kaisa. A sudden departure can undermine a company's finances.
Due diligence is of limited help. Mao came from the Communist Youth League, whose alumni include former President Hu Jintao. Now that Hu's former aide Ling Jihua is under investigation for graft, an association that might once have comforted investors may now be a liability. That's the other problem with political capital: the more investors know, the harder it is to value.