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China Business & Finance  Added
Small investors complain of non-payment on LeEco instruments

Defaults reveal group’s heavy use of informal funding and the risks this posed

LeEco Global Group signage at the company's headquarters in San Jose, California © Bloomberg

YESTERDAY by: Emily Feng in Beijing
LeEco has failed to pay hundreds of individual investors their returns on time, spelling trouble for the cash-strapped firm.

The defaults point to how the group made extensive use of informal channels to fund its rapid, debt-backed growth, and the risk to investors this presented.

LeEco has been able to raise funds quickly in part through the sale of its wealth management products to mom-and-pop investors, according to stock filings. It raised 91.65m dollars in 2016 from selling online financial products.

However, according to investors, LeEco has not paid out returns for its “Zunxiang” financial management products, in which investors put up anywhere between Rmb10,000 to Rmb50,000 (1,480 to 7,390 dollars) and receive annualised returns of 7 per cent over a 164-day holding period.

On its website, LeEco also advertises “flexible” financial management products that involve investments as low as Rmb100 (15 dollars) for a 5 per cent annualised return after about a month.

Amid fears that LeEco is insolvent, individual investors who bought Zunxiang products took to online forums to report that they had not been paid on investments that came due this week.

“It has been three days since LeEco was supposed to pay me. Customer service has told me to be patient, but my heart feels like it has stopped,” wrote one investor who invested Rmb30,000 (4,436 dollars) in LeEco instruments.

“Will they really hit the road and run from their debts?” wrote another.

LeEco did not respond to a request for comment.

LeEco’s delayed payments speak to the dangers posed by China’s 9.4tn dollars shadow banking sector. Off-balance sheet or non-bank lending has allowed Chinese companies to continue raising money even as economic growth slows. It has also encouraged over-investment and contributed to asset bubbles.

Insurance companies have been some of the biggest players in the shadow banking sector, with companies such as Anbang Insurance Group and Baoneng Group reaping billions in renminbi by selling high-yield wealth management products (WMPs) marketed as life insurance policies.

But in recent months, regulators have also curbed shadow lending by mandating stricter corporate accounting practices and cutting off capital used by banks to invest in WMPs. Authorities have also detained numerous businessmen and at least one high-ranking regulator who benefited from selling WMPs.

That points to ominous signs for LeEco, which managed to fund its expansion through a combination of on and off-the-book financing.

In particular, LeEco has used its unlisted subsidiaries to raise money,as regulators pay less attention to non-publicly traded entities. LeEco’s subsidiaries have formed at least 50 private equity funds in which they sold shares or bonds that can be exchanged with shares, according to public asset management data.

Caixin, a Chinese financial news website, reported on Friday that a LeEco subsidiary had breached an agreement with an asset management company to redeem in cash Rmb75m (11.09m dollars) of convertible bonds that came due two weeks ago. The asset management company, Shanghai Qicheng, and LeEco did not respond to requests for comment.

LeEco’s leaders also turned to share-backed funding. Brokerages lend money using shares as collateral, dealings that do not show up in records within the formal banking system but expose the borrower to significant risk if the share values plunge.

LeEco founder Jia Yueting has pledged more than 97 per cent of his own shares in LeEco’s listed arm for loans so far, according to the company’s first-quarter financial data. Mr Jia’s brother, Jia Yuemin, put up 98 per cent of his shares in exchange for credit.

More than 99 per cent of founder Mr Jia’s shares were frozen by a Chinese court earlier this month in lieu of missed interest payments on a loan from China Merchants Bank.