中文版

Professor of Finance

Educational Background

Ph.D. Finance, University of California, Berkeley, 1999
Ph.D. Applied Physics, University of Michigan – Ann Arbor, 1991
M.S. Physics, Michigan State University, 1988
B.S. Physics, University of Science and Technology of China, 1985

Research Areas

Asset pricing: corporate decisions and security returns; information and learning in financial markets; credit risk and returns on stocks and bonds; market liquidity; financial derivatives and risk management; portfolio choice.

Financial intermediaries: mutual funds, hedge funds, and financial analysts.

Emerging markets: financial market development, role of foreign and/or institutional investors in these markets, especially in China.

 

New alarm bells ring over Internet finance
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 (US$44.9 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 Cai 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$85 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.”

Wang Difeng, an analyst at Yingcan Group, agreed.

“To protect investors’ interests, the platform must specify the details of investment risks and capital flows, give ratings or certificates to investors based on their risk appetite and risk tolerance, and disclose information to help them assess the product,” he said. “If the platform fails in any of these matters, it should be held responsible.”

To lower the risks, Chinese regulators in May barred individuals from buying privately placed notes overseen by the China Securities Regulatory Commission. But the rule doesn’t apply to the bonds sold on Zhao Cai Bao or similar platforms that act in cooperation with local exchanges because they are regulated by various regional financial authorities, said Yan Hong, a professor at the Shanghai Advanced Institute of Finance.

“You could call it a regulation arbitrage,” Yan told Shanghai Daily. “When there is a grey zone, there are players who take advantage of that.”

Yan said unified regulation of this sector is desperately needed, though who should assume that supervisory role is unclear.

“Regulators are caught in an awkward position,” Yan said. “On the one hand, they want to be broadening financing channels for small companies, but at the same time, they also want to protect retail investors who can be gullible when it comes to accepting guarantees about ‘risk free’ investments.”

Privately placed notes totaled 76.27 billion yuan on the Shanghai and Shenzhen exchanges as of December 26, with the average coupon rate as high as 9.37 percent, public data show. The scale and yields could be larger if bonds sold on local exchanges or online platforms were included, 21st Century Business Herald reported.

“It seems to be risk exposure by chance,” said Wan Dao, senior analyst at the financial markets department of China Merchants Bank, referring to the default case. “But it was actually the financial market’s reaction toward a less profitable real economy."

He added, "Finance can backfire sometimes when the economy is weak in momentum because the system seeks to boost itself rapidly by using sophisticated financial tools, leaving risk to anyone who takes up the baton."

The default follows several other cases of financial irregularities fraud, highlighting loose affiliations across China’s online financial industry, where some players suffering financial hardships. That makes it hard to determine who should take responsibility when there are defaults or problems.

Among other cases hitting the headlines, forged bond agreements led to brokerage Sealand Securities sharing potential losses of up to US$2.4 billion with counterparties, and 1 billion yuan repayment crisis struck online peer-to-peer lender Jinjinlian. The lender was said to be financially backed by the municipal government in Wuhan and several state-owned funds and financial institutions.

“These cases send us a warning signal,” Yan said.

“Even big platforms like Zhao Cai Bao can’t prevent defaults by issuing guarantees. We should realize that there are lots of assets spinning around within the financial system that never make their way to the real economy.”


Link: http://www.shanghaidaily.com/business/biz-special/New-alarm-bells-ring-over-Internet-finance/shdaily.shtml

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