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Cash-strapped Chinese giant taps a new money source: its workers

by HBR

February 20, 2018 | 4:55 pm
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Shortly before payday, an email went out from top executives to their employees: Give us your money, and we’ll make it worth your while.

It was one of many pitches by H.N.A. Group, a Chinese conglomerate struggling under an estimated $90 billion in debt accumulated during a global shopping spree that included buying stakes in such multinationals as Hilton Hotels and Deutsche Bank.

In its email to employees, the company advertised an “employee treasure” product with an 8.5% return if a worker handed over $1,500. A similar one dangled 9%. A third mentioned a return as high as 40% if an employee ponied up $15,000.

These pitches, more than a dozen of which were reviewed by The New York Times, were not part of an employee-stock program. Instead they appear to be high-interest loans, with the company as borrower and its workers as lenders.

H.N.A.’s overtures to its employees come at a difficult time for many of China’s biggest dealmakers. The company is among a group of large Chinese conglomerates being chastened by the government for making splashy overseas purchases of hotels, movie theaters and film-production companies. The resulting debt among the aggressive buyers got so big that Beijing saw it as a threat to the country’s broader economy.

The company is facing its own financial pressures. H.N.A. has seen its borrowing costs rise sharply on the global bond market in recent months, an indication that some investors are increasingly worried about the company’s ability to pay its debts. Seven public companies under the umbrella of H.N.A. have suspended trading of their stocks, suggesting that big announcements that could affect key businesses are in the works. The company also is starting to sell assets.

In a recent interview with Reuters, H.N.A. chairman Chen Feng acknowledged financial troubles and vowed to overcome them.

It is unclear how much money H.N.A. has raised from its employees. The company long has offered such investments to its employees as a way to incentivize them and to let them share in the company’s success, Thomas A. Clare, an attorney for H.N.A., wrote in an email.

“H.N.A. has never approached the offering of these products and opportunities as a financing mechanism,” he wrote, “as the amounts contributed by H.N.A. employees to these opportunities are a very small percentage of the funds raised.”

Companies around the world allow employees to buy stock or provide other ways for workers to invest in the business. However, the H.N.A. pitches do not offer direct ownership stakes in the business.

The offers reviewed by the Times had similar hallmarks, namely high returns in exchange for funding certain operations. In an email dated Jan. 4, for example, one H.N.A. unit told employees that it needed nearly $8 million to fund a duty-free business. It advertised a 9.8% annualized interest rate. One week later H.N.A.’s media-and-entertainment arm said that it was looking to raise nearly $80 million from employees, pledging strong returns and a plan to build up the business.

Some emails have asked for big investments, while others have emphasized how little employees have to invest to be eligible for hefty returns. One email, dated Jan. 17, offered commissions to employees who referred friends and family.

“If you successfully invite someone else to invest in fixed-term wealth-management products,” the email told employees, “you can get a high commission.” The email did not elaborate.

In one seven-day period in January, a single H.N.A. employee received seven separate pitches. Clare wrote that any increase would be the result of trying to incentivize more employees.

Chinese companies often have turned to individual investors or their own workers   to raise money. However, according to some China-finance experts, such moves can signal problems.

“It’s a desperation measure when companies really have no other source of financing and they are stuck,” said Anne Stevenson-Yang, co-founder of J Capital Research, a corporate-research firm.

A small company in the southeastern Chinese city of Wenzhou called Wenzhou Liren Educational Group made national news in 2011 after it went bankrupt and was unable to repay nearly $790 million it had borrowed from employees and local residents. In 2015 an online peer-to-peer platform called Great Group pressured employees to buy investments in order to raise funds when it found itself in a financial bind, the Chinese news media widely reported. The two companies did not respond to requests for comment.

“Internal funding is a common way for companies to raise funds,” said Sun Lijian, an associate professor at the China Center for Economic Study at Fudan University in Shanghai. “But employees shouldn’t be forced to contribute, and they should be informed of all the details of the project, including the risks.”

Raising money from workers is legal in China, experts say, if an employer clears regulatory hurdles, particularly permission from the country’s central bank. The People’s Bank of China did not respond to a request for comment.

Companies raising money directly from Chinese investors must obtain licenses from securities, insurance or banking regulators. The H.N.A. pitches reviewed by the Times did not say whether they had been reviewed by regulators. Clare wrote that the offerings comply with all laws and referred questions to the various Chinese regulatory agencies, which did not respond to requests for comment.

H.N.A. sometimes directed employees to Jubaohui, its online investment portal, which generally is open to Chinese investors. The portal also has an employees-only area.

Publicly H.N.A. often positions itself as a major player on the move, with talented leadership and vast resources at its disposal. However, Jubaohui has had trouble paying back some investors, according to an email sent to an investor and reviewed by the Times. It promised to pay later, at a higher interest rate, after it was unable to make the final payments on two investments at the end of last year.

The payments were eventually made, said the employee who had received the email. The Wall Street Journal earlier reported on a similar problem with a different H.N.A. investment.

“Absent specific evidence that Jubaohui was actually late in making a required payment,” Clare wrote, “there is no basis for any such statement or speculation.”

As H.N.A. has faced more questions about its operations by both local and foreign media, the company has issued groupwide emails urging employees not to speak to reporters. In January, according to an internal document reviewed by the Times, H.N.A.’s human-resources department told employees that they would be required to take a test on how to deal with the news media.

Meanwhile the emails kept flooding employee inboxes.

“Your year-end bonus is here,” said one sent on Jan. 15, for an investment tied to H.N.A.’s Qianhai Air and Shipping Exchange arm. In one corner of the email was the animated image of a smiling barrel overflowing with gold coins.

The next day another one backed by Qianhai Air and Shipping was sent out. It cited the rising cost of school and real estate in major Chinese cities, then contrasted it with the $16 minimum investment for the product, called Ladle Full of Gold.

“The cost of living is high?” it said. “Ladle Full of Gold won’t give in!”

(Alexandra Stevenson is a Hong-Kong-based business reporter for The New York Times. Cai Li is a writer for The New York Times.)

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by HBR

February 20, 2018 | 4:55 pm
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