As well as borrowing from banks and peer-to-peer websites, the embattled China Huishan Dairy Holdings Co. used a small financial exchange in the northeast of the country to tap private investors for some of the 40 billion yuan ($5.8 billion) of debt which it’s now struggling to repay.

Trading records from the Dalian Financial Assets Exchange Co. show that investors have been trying to unload Huishan Dairy debt they purchased through the exchange, as of Friday morning. Of the 196 debt instruments listed for sale in Dalian, more than half are posted by Huishan Dairy investors, many of whom are willing to absorb losses to sell out of their holdings.

The attempted sales show how ordinary Chinese investors have been caught up in the travails of Huishan Dairy, which is seeking to roll over its debt after the mysterious 85 percent collapse of its Hong Kong-listed shares last Friday. Though Chinese banks have some of the largest exposures, the milk producer also tapped into individuals’ thirst for high-yielding products.

“Chinese companies are going to the local exchanges or P2P firms for money when banks say they have borrowed enough loans,” said Ma Jun, chief analyst at research firm Yingcan Group in Shanghai. He said investors who bought Huishan debt in Dalian now face potential losses.

P2P Loan

Private investors are also exposed through a 50 million yuan loan raised in February by peer-to-peer lender Hongling Capital, which offered a 13.5 percent return.

Calls to Huishan Dairy’s offices in Hong Kong and Shenyang weren’t answered, and an external spokeswoman didn’t respond to an email. The Dalian exchange didn’t immediately reply to calls seeking comment.

A Chinese money manager called Gopher Asset Management Co. applied in Hong Kong court to freeze assets of Huishan Dairy, according to a court document dated March 27. The document didn’t explain the relationship between the asset management firm and the dairy company. It said the move was to support court action in Shanghai Second Intermediate People’s Court, though it didn’t elaborate.

It’s not clear how much debt Huishan issued through the Dalian exchange, but in a local newspaper advertisement in October it said it was seeking up to 300 million yuan to purchase equipment for its dairy farm, situated in nearby Liaoning province. The various Huishan debt products were offered to investors in minimum tranches ranging from 50,000 yuan to 500,000 yuan, the advertisement said.

Exchange records show Huishan Dairy has issued more than 100 products to individual investors through Dalian since October, promising annual returns between 6.8 percent and 7.2 percent on the two-year debt.

On Friday, one unidentified investor was offering the Huishan debt for sale at a yield of 9.34 percent, compared with the 7.2 percent coupon, suggesting a substantial loss.

Asset Exchanges

Dalian is one of 10 financial exchanges in China, which provide online platforms where companies can sell debt to private individuals and institutions. Despite being labelled as exchanges, they operate more like government-backed P2P sites than the better-known stock markets in Shanghai and Shenzhen. One of the Dalian exchange’s major shareholders is the government’s Dalian State-Owned Asset Investment Operation Group Co.

Defaults on bonds sold through such online platforms are becoming more common as the central bank’s tightening pushes up borrowing costs. Cosun Group, a Chinese telecom company in the southern Guangdong province, defaulted on bonds sold to individual investors on Zhao Cai Bao, a platform operated by an Alibaba Group Holding Ltd. affiliate.

To read a story about Huishan Dairy’s shadow banking links, click here

Also in the regular bond market, there have been nine onshore bond defaults this year, compared with seven in the same period of 2016, according to data compiled by Bloomberg.

“More and more companies are tapping shadow banking funding channels to raise money after their loan quota at banks are reached,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. “The excessive debt raising is risky.”

Huishan Dairy also tried to raise financing from private investors through Zhejiang Financial Assets Exchange Center Co., according to one of the allegations in Muddy Waters LLC’s report in December, which claimed the dairy company was worth “close to zero.” A customer service representative at Zhejiang Financial, another of China’s asset exchanges, declined to comment.

In Huishan Dairy’s first detailed statement since it halted trading in its shares last Friday, the company said Tuesday that it had been unable to contact one of its executive directors for the past week. Huishan said it was late on some bank payments and that its stock would stay suspended until the board received an update on the firm’s financial position.

— With assistance by Jun Luo, and Judy Chen

Bloomberg

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