A $117 Billion Chinese Wealth Manager Says It Was Scammed
Comment of the Day

July 12 2019

Commentary by Eoin Treacy

A $117 Billion Chinese Wealth Manager Says It Was Scammed

This article from Bloomberg news may be of interest to subscribers. Here is a section:

To be sure, Noah is not alone. Central China Securities Co., a mid-sized brokerage, said on Thursday two asset management products totaling 240 million yuan are in danger of defaulting after the borrower falsified documents. It didn’t provide more details.

For Noah, the incident has raised questions about the firm’s approach to risk management, said Yan Hong, a finance professor at Shanghai Jiao Tong University.

“It exposed the lack of credit-risk controls and absence of a verification mechanism for contract authenticity, which is a low-level mistake for a manager of private credit products,” Yan said.

It’s not the first time that Noah’s investments have run into trouble, as JPMorgan Chase & Co. analysts noted in a July 8 research report. In 2017, products managed by Gopher had exposure to China Huishan Dairy Holdings Co., which collapsed after being targeted by short sellers. In May 2018, Noah’s Hong Kong unit was fined by the city’s securities regulator for failing to comply with know-your-customer, due diligence and other requirements.

One lesson for asset managers is that they should talk to all of the relevant parties in an investment before committing money, said Jesse Si, a Beijing-based senior manager at Mintz Group, which specializes in due diligence investigations.

Eoin Treacy's view

A clear trend is emerging of fund managers who invested in opaque instruments in an effort to generate outsized returns and are now suffering the consequences. GAM in Switzerland, Neil Woodford in the UK, France’s H2O and a string of Chinese firms have all suffered from being unable to meet redemption requires because they invested in highly illiquid instruments.

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