Long before China Huishan Dairy Holdings, China's largest daily farmer, became known as the latest Chinese corporate fraud whose stock crashed 90% in seconds after a Muddy Waters report brought attention to its questionable shadow banking funding, exposing the company as a hollow sham and leading to the prompt departure of four of its directors who hope (in vain) to escape prison time, the company was best known for being the first ever company to do cow-collateralized stock buybacks.
For readers whose recollection on this particular topic, fascinating as it may be, is vague, this is what we wrote last May:
"China Huishan Dairy is selling about a quarter of its [cow] herd, about 50,000 animals, to Guangdong Yuexin Finance Lease for 1 billion yuan ($152 million) and then renting them back. The reason: to obtain urgently needed cash (let some other sucker CEO worry about paying the coupon on the lease), so it can repurchase glorious amounts of its stock.
And yes, cows were used as collateral. "It’s not very common to use cows as collateral," said Robin Yuen, an analyst at RHB OSK Securities Hong Kong Ltd. "The value of a cow would fluctuate depending on milk prices and other factors, so it’s a risky asset for lenders. It would be hard to do forced selling - there’s no liquid market for a large number of cows."
So anyone wondering where Muddy Waters may have gotten the idea that not all is well with the company engaging in the sale-leaseback-of-cows-to-buyback-it-stock, Robin Yuen, an analyst at RHB OSK Securities Hong Kong, who had a Sell rating on the company long before Muddy Waters appeared on the scene, explained:
"Huishan Dairy seems to be selling cows and leasing them back in order to raise money now, because they’ve been using cash to buy back shares.... "It’s not very common to use cows as collateral. The value of a cow would fluctuate depending on milk prices and other factors, so it’s a risky asset for lenders. It would be hard to do forced selling - there’s no liquid market for a large number of cows. The chairman wants to prop up the share price for reasons that are unclear."
One year later the reasons became clear: the company was a fraud, and only his relentless buybacks provided the levitation needed to offset the pesky sellers and shorts, which incidentally led to our conclusion, which predicted the inevitable failure of this particular Chinese fraudcap: "what's the point to propping up the stock price in an unviable company, and not to sell to the greatest fool? Especially since if there is one thing Chinese capital markets have a lot of, it's the latter."
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The above, very long preamble takes us to the "logical" continuation of the cows-as-collateral story, because less than a year after cow sale-leaseback transactions emerged in the "financial bubble banana" country that is China, they have now moved to the original banana republic: Zimbabwe.
Bloomberg reports that commercial banks in Zimbabwe will soon be forced to accept livestock such as cattle, goats and sheep as collateral for cash loans to informal businesses under a new law presented to Parliament Tuesday. Under the "Movable Property Security Interests Bill" tabled for debate by Finance and Economic Development Minister, the Reserve Bank of Zimbabwe will compile and administer a collateral-security register in which small-business operators and individuals can register their movable assets as security for credit.
Translation: step aside cash-collateral, fractional-reserve banking, here comes cow-collateral reserve banking.
It gets better.
In addition to cows, pretty much anything will soon be bank-eligible collateral as Zimbabwe desperately attempts to restart its monetary system. Vehicles, television sets, refrigerators, computers and other household appliances will become acceptable as collateral once they are evaluated and registered in the central bank’s register, according to Chinamasa.
It probably makes sense: the US has loan sharks; Zimbabwe has a central bank.
“As minister in charge of financial institutions, I feel there is need for a change of attitude by our banks to reflect of our economic realities,” he said. Banks are “stuck in the old ways of doing things and failing to respond to the needs of our highly informalized economy,” he said.
It remains unclear if this latest Zimbabwean monetary experiment will work: the southern African nation has mainly used the dollar since economic mismanagement and runaway inflation rendered its own currency worthless eight years ago, BBG notes. A liquidity squeeze ensued as growth faltered and a strong dollar eroded the competitiveness of Zimbabwe’s exports.
And now, over a decade since its infamous hyperinflationary episode, Zimbabwe finds itself in another cash crunch so severe that banks are limiting customer withdrawals.
That's where the cows come in.
And yet, in all of this one thing remains unclear: once the debtors are unable to repay the central bank, and the lienholder collects on virtually every piece of livestock, as well as every "car, TV, refrigerators, computer and other household appliance" and nationalizes every asset that is and isn't nailed down in Zimbabwe , what happens then?