A complaint by China Vanke to authorities over how its top shareholder, financial conglomerate Baoneng, has financed purchases of stock in the property developer has prompted banks to seek an exit out of the funding arrangements, Chinese business magazine Caixin reported.
The country’s biggest developer is embroiled in a high-profile corporate battle with Baoneng which has built up a stake of 25%.
Fearing a hostile takeover bid from Baoneng, it has unveiled a $6.9bn deal with Shenzhen Metro Group that would dilute Baoneng’s stake.
Baoneng has for its part has tried unsuccessfully to oust Vanke’s board.
Vanke this week asked the China Securities Regulatory Commission to investigate the funding of Baoneng’s stake, saying that shadow financing used by a Baoneng unit had violated regulations.
Vanke and analysts have warned that if the banks were to back out of the financing, this could lead to a steep drop in its share price.
“If banks decided to terminate, Baoneng would need to step up and fill the gap.
The market expects Baoneng will not have enough money to do so and it will have to sell Vanke’s shares, which is what Vanke wants to see,” said Alvin Cheung, associate director of Prudential Brokerage. It was unclear from the Caixin report which banks were looking at exiting the asset management schemes used to finance the purchases.
It quoted an unidentified manager of the schemes as saying that banks had been in touch but did not elaborate further on its sourcing.
According to a Vanke document, the banks that participated in the asset management schemes include Pingan Bank, Guangfa Bank, China Construction Bank, China Minsheng Banking and one of its subsidiaries.
China Construction Bank said it is still looking into the situation and has no information to provide to the public at the moment.
China Minsheng declined to comment.
The other banks did not respond to requests for comment from Reuters. Baoneng has spent a total of 21.6bn yuan to purchase 10.4% of the company as of July 15 via nine structured asset management products, Vanke has said.
Such schemes have been widely blamed for excessive leveraging that helped drive a boom and then a rout in China stocks last year. The securities regulator has stepped up scrutiny of such funding arrangements after the rout.
The schemes usually have two share prices set that can prompt a reworking of the deals, said a person familiar with the matter at a leading Chinese investment bank.
If the company’s share price falls below the upper level, then the bank can ask the borrower to make up the difference while if the share price falls below the lower level, then the bank usually has the right to a margin call and can sell the shares, the person said.