D'Long

D 'Long International Strategic Investment, China's biggest privately held company, was shut down in June, its Pudong headquarters sealed off by the China Securities Regulatory Commission (CRSC) and its assets frozen by the China Banking Regulatory Commission as D'Long Chairman Tang Wanli kept shifting his base from one Shanghai hotel to the next.

Though officials have yet to confirm it, news reports suggested the government would ask the banks to reschedule loans and rescue the conglomerate because its collapse could topple scores of linked companies that acted as D'Long's guarantors.

Starting in April, when three of six D'Long affiliates crashed on the Shanghai stock exchange, losing RMB 6.1 billion of their value, courts from eight provinces put claims on the conglomerate's Shanghai as- sets of US$157 million. For years, lenders had been banking D'Long-linked company shares as collateral for loans.

With debts piled up to an estimated US$337.3 million (RMB 2.8 billion) in Shanghai alone, the ketchup-to-cement conglomerate was unraveling fast by June. That month, the Industrial and Commercial Bank of China (ICBC) demanded immediate payment on loans that had been rescheduled so often that the outstanding interest on them – RMB 30 million – had outstripped the RMB 25 million principal.

But that was peanuts compared to other claims in June: six companies affiliated with D'Long itself filed suit claiming a D'Long brokerage misappropriated RMB 600 million. As D'Long unraveled, and two independent directors of D'Long Strategic quit, Tang mustered and then deployed yet another of his famous crisis response teams, but the situation only went from bad to worse.

Starting out in Zhejiang province with a mission to turn moribund state enterprises into viable business assets, Tang and his brother Tang Wanxin branched out from their film processing business in all directions: financial services, cement, tomato paste, airplane building, agribusiness, food processing, and so many other businesses that the empire now looks too big to let die. At last report, it was invested in over 180 companies.

One analyst told CER that D'Long's business model looked unsustainable at least a year ago. The books of D'Long Tunhe – which he called the conglomerate's "integration platform" – showed loans, mostly bank loans, growing from RMB 200 million in 1999 to RMB 3.2 billion by mid 2003.

As Tunhe amassed more assets, he said, it grew more dependent on borrowing and the revenue-expense gap kept widening. The situation deteriorated sharply last year when revenue plummeted from RMB 488 million in 2002 to RMB 277 million in 2003 – while investments rocketed from RMB 516 million to RMB 1.03 billion.

The loans were often guaranteed by companies affiliated to D'Long. The lenders included China's big four state banks, many city commercial and joint-stock banks, but also China Minsheng Banking Corp, the mainland's only private bank, which plans a US$1 billion initial public offering in Hong Kong later this year. D'Long-linked companies reportedly owe that lender around US$70 million and news of D'Long's shutdown knocked Minsheng share prices down 9% on the Shanghai stock exchange the same day.

Despite the spotlight on the bank's risk management process, a Minsheng official insisted it would go ahead with its IPO in the second half of the year. Why Minsheng or any other bank would lend to D'Long when it was so transparently shaky is unclear. In soaring hyperbole, the company web site sketches a bright future, the leaders of the Communist party, regulators and D'Long management working through the credit crisis together so that the company can move on and scale new heights.

In fact, some banks stopped making loans to D'Long, or at least reduced their lending last year. But reports that the Shanghai bureau of the China Banking Regulatory Commission had ordered the banks to stop lending to D'Long were dead wrong, according to an official who said the commission had no mandate to issue such an order. It could alert lenders of dangerous risks, and did so in D'Long's case, but that was the extent of it, he told CER.

What happens next probably won't be known until the CSRC gets all the dirt out from under D'Long's very ratty-looking carpet.