The Washington PostDemocracy Dies in Darkness

China’s richest man might have been running a massive fraud

(AP Photo)
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The only thing we know for sure is that stock in Hanergy Thin Film Power, a solar panel company equipment owned by what was at the time China's richest man, fell 47 percent last Wednesday. We don't know exactly why it fell, or even how much its Chairman Li Hejun lost when it did, since he apparently upped his bet against his own company in the days before the crash. Just that it did.

When you put all the pieces together, though, it looks even worse. It looks like Hanergy might be China's Enron: an Energy Company of the Future™ whose stock price could only go up as long as it was borrowing money and could only borrow money as long as its stock price was going up. In other words, a house of cards that was just waiting for the first piece to fall.

Now, the first thing to know about Hanergy is that it's really two companies. There's the privately owned parent corporation, Hanergy Group, and the publicly traded subsidiary, Hanergy Thin Film Power (HFT). So far, so normal. The curious part, though, is that almost all of HFT's sales are to its parent company at a net profit margin of 50 percent. And even more curious is that the parent company hasn't actually, well, paid for most of the solar panel equipment it's ostensibly bought from HFT. Through 2013, only 35 percent of the accounts between the two had been settled.

Why so low? The question answers itself. Hanergy must not have the cash. The problem is that the parent company has borrowed a lot of money at high interest rates, but can't make that back since its factories, which, remember, are supposed to be building solar panels out of the equipment it's gotten from HFT, are running at such low capacity—or maybe none at all, according to a hedge fund manager who visited a plant—that they must be losing money. So it sure seems like Hanergy Group has more debt than it can pay back, but is trying to keep people from realizing that by moving money from its left hand to its right and back again—that is, between its parent and subsidiary—to make it look like there's actually money coming in.

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The question, then, isn't how this fell apart. It's how it lasted as long as it did. And the answer is HFT's stock. Think about it like this. How does a company that's got too much debt and too little profits—if any—convince people to keep lending to it? Well, it could try to hide what it owes and what it's making, but even that probably wouldn't be enough. It'd need collateral. Like, say, its subsidiary's booming stock. Although in this case, the word "booming" doesn't come close to describing what happened. Before its recent plunge, HFT's stock had risen more than 20-fold since the start of 2013 on its supposedly brisk business with its parent company. But even then, this made approximately zero sense. It wasn't just that HFT went up so much that, on paper, it was worth more than six times as much as its closest competitor. It was the way it went up—specifically, in the last 10 minutes of every day.

It turns out there are two HFT stocks. There's the money-losing one most of the day, and the invincible one at the end of it. By the Financial Times' calculation, if you'd bought $1,000 worth of HFT stock at 9 a.m. every morning and sold it at 3:30 p.m. every afternoon since January 2013, you'd have only had $635 left by this February. But if you'd sold at 3:50 p.m. instead, your stock would have gone up to a healthy to $1,285. And if you'd held on until closing at 4 p.m., your stock would have shot up a more-than-healthy eight times to $8,430.

That's some pattern. And it's one that isn't likely to have happened by chance. It sure seems like—there are those words again—HFT's stock must have been getting manipulated up at the end of every trading day. But who could have been doing this? Well, there aren't too many suspects. That's because Hanergy's Chairman, Li Hejun, is not only the person with the strongest motive to do so, but he's also about the only one who seems to have been buying HFT's stock in the first place. Indeed, while hedge funds have been so eager to bet against HFT that it's hard to find shares to short, Hejun has increased his holdings up to the legal limit. He now owns 74.96 percent of HFT against the 75 percent he's allowed to own.

Here's one theory about what happened. Suppose that Hanergy wasn't making enough money to pay back what it owed other than by borrowing from new lenders to pay off the old. And then suppose it got these new loans by pledging its subsidiary HFT's shares as collateral. (We actually know it did this). It'd need those shares to keep going up if it was going to keep getting the loans it needed—so it'd use what money it did have to push the stock price higher and higher. But there's only so much it could do this. Once Hejun hit the 75 percent limit on how much of the company he could own, he couldn't push up its price anymore. Then Hanergy wouldn't be able to borrow anymore, and, as a result, wouldn't be able to pay back what it owes anymore. It'd default, and its lenders would sell the HFT shares being held as collateral to try to recoup their losses—which, the Financial Times reports, is exactly what happened.

Again, this is just speculation. It's trying to fit what we know into a story that makes sense. But if it were true, we might expect Hejun to start betting against his company once he realized it was all going to come crashing down. And that seems to be what he did. Hejun increased his short position against HFT from 5.81 to 7.71 percent right before its stock halved. It's certainly curious.

It might just be Enron with Chinese characteristics.