THE mystery surrounding Chinese dairy firm China Huishan Dairy Holdings Co. further deepened after its four remaining non-executive directors resigned Friday following weeks of speculation about what was going on at the company.
According to Bloomberg, the group walkout comes after a mysterious and catastrophic drop in shares saw the company lose a whopping US$4 billion off its market value in just one day.
On March 24, shares of China Huishan Dairy Holdings plunged 85 percent in an hour, the biggest intraday fall in Hong Kong history, which prompted an indefinite halt in trading. The ripples of the depreciation were felt in a number of firms that are linked to the Liaoning-based company, which has more than 11,600 employees and operates the largest number of dairy farms in China.
Speculation went wild as to the reasons behind the sudden and unexpected crash. Rumours abounded that the company had been forging invoices that were uncovered in a recent audit carried out by Bank of China, a rumour the company has flatly denied.
Another twist in the plot came when the company confirmed that it was not able to track down one of its executive directors who was responsible for overseeing and managing the group’s treasury and cash operations.
According to a statement issued by the company, Ge Kun has been uncontactable since March 21 when she sent a letter to Yang Kai, chairman and controlling shareholder as well as Ge’s husband, indicating that recent “work stress had taken a toll on her health” and that she would be taking a leave of absence and “does not want to be contacted at this time.”
Suspiciously, Ge’s request for leave came on the same day as Yang found out the firm had been late in bank payments.
In response to the revelation, Yang was forced to reach out to the Liaoning Provincial Government for assistance to avoid a complete crash.
The Chinese government cannot afford to let Huishan fail. If the company did go bust, the fallout could be disastrous for some Chinese banks. At least one of them has already felt the chill; Jiutai Bank, which is the dairy maker’s second-biggest creditor, saw the biggest one-day drop in its shares last week.
The dramatic scale of the devaluation has left many questioning the stability of China’s financial system and lending culture. An IMF report pointed out last year that China has approximately US$1.3 trillion in risky loans that have been extended to borrowers that don’t have sufficient income to cover interest payments. The potential loses that could result from this are as high as 7 percent of the country’s gross domestic product.
Huishan was one of these borrowers, with the company getting so desperate that they were using their own cows as collateral to borrow against.
Back in May last year, the company sold about a quarter of its herd – some 50,000 animals – to Guangdong Yuexin Finance Lease Co. for CNY1 billion (US$152 million) and then rented them back.
The company’s 190,911 dairy cows, valued at CNY5.73 billion (US$831 million), are spread across 78 farms in Liaoning, a province in northeastern China between Inner Mongolia and North Korea.