The Development Of Quasi-Financial Holding Group, And Its Bankruptcy Risk's Control And Disposal

Since Chinese reform and opening up, the domestic capital market has made great development. Many industrial enterprise groups has transformed into the so-called"Quasi-Financial Holding Group (abbreviated QFHG)"that controlling no less than two financial institutions through direct investment or mergers and acquisitions during the reforming process of China's market economic system. According to a survey conducted by People's Bank of China, up to June 30, 2005, there have been 528 industrial enterprise groups investing in more than two types of financial institutions, and 57 among them have formed the QFHG. When the integration of industry-finance capital (IIFC) was carried out enthusiastically at home, the famous private QFHG, Delong collapsed in 2004. As Delong is such a mighty group with many financial institutions, listed or non-listed companies and investors, the crisis has left a great amout of bad assets to the country's financial system, and led to a major negative impact on the economic and social development. It also gave an alarm on the bankruptcy risk to other QFHGs and the financial regulatory agencies alike.This dissertation takes the Delong's bankruptcy as case and background to study systematically how the QFHG develops, and how to control and dispose of its bankruptcy risk, and tries to answer the following questions: What lessons can we learn from Delong, and which kind of mode should be taken for China's QFHG to achieve sustainable development? How to effectively assess, control and dispose the bankruptcy risk of QFHG and its subsidaries? How to carry on reorganization prossess in accordance with the market economy rules in the framework of new bankruptcy law? Did the Delong's bankruptcy conducted by Huarong Asset Management Corporation (HAMC) with the administrative support meet the efficiency goals of insolvency procedures? And how to supervise the QFHG effectively, and how to keep an arm's length of distance when government has to play a role in the bankruptcy prossess of an entity with protential systemic financial risk?This dissertation includes the following main content.Firstly, this dissertation gives a brief economic explanation to the formation of QFHG on the bais of transaction cost theory, property rights, agency theory, and the resource-based and capability theory of firm, and tells the QFHG's different developing modes in market-based financial system and bank-based financial system. The former is called"capital overflow"mode, and the latter is called"finance-dependent"mode. Then we analyze the development status and risk characteristics of Chinese QFHGs. Because China draws more experiences from Japan and Korea in economy development, the financial markets are dominated by banks, so China's QFHGs are prone to be "finance-dependent" mode. As the risk of QFHG is contagious, the bankruptcy of QFHG may cause financial crisis and social upheaval. The Delong crisis provides an excellent case study opportunity.Taken the three listed companies"Hejin Investment, Xiang Torch, and Xinjiang Tunhe"as the industrial representatives of Delong, this paper analyzes the financial motivation of industrial groups'IIFC in China, that is aiming at the resolution of financial constraints faced by the group's rapid development. But the QFHG's managers usually overestimate the company's debt capacity (DC) with their dreams of empire building. This may result in the problem of serious debt overhang, and therefore brings the group exposing to non-controllable bankruptcy risk. In order to control the bankruptcy risk, managers should reasonably estimate the overall debt capacity (ODC), the debt-limit-should-be(DLSB)and the interest bearing debt capacity (IBDC) based on the assets cover and net operating cash flow, and manage to control the actual related financial leverages within the scope of DLSB. Delong's crisis originated in its financial institutions, one important reason that the industrial listed companies are affected is their serious debt overhang, that is the real leverages exceeding their objective DCs too much, and so can't pay their due debt.To illustrate whether the Delong's bankruptcy conducted by HAMC under administrative support before the new bankruptcy law is enacted meets the efficiency goals of insolvency procedures. The dissertation, based on theories about how to solve financial difficulties privately, proposes a new reorganization model of financially distressed firm according to the specific regulations of the new enacted bankruptcy law. The main findings are that the negotiation platform provided by the statutory reorganization mechanism can contribute to the elimination of inefficient decisions existing in the out-of-court workouts. This shows that the reorganization procedure is a Pareto efficient institutional arrangement. When the firm's expected reorganization value is relative low but still more than the liquidation value and the bargaining cost of the debt cut exceeds the abandoned reorganizing proceeds of dispersed creditors, then the senior bank's debtor-in-possession (DIP) financing will be conducive to the Pareto improvement of the debtor's reorganization. Based on the case study of"Hejin Investment", we find that the reorganization theory are effective, and suggest the Delong crisis disposal basically meets the goal of ex post efficiency while taking the ex ante efficiency into consideration.Finally, learning from Delong crisis and the disposal experience, the dissertation gives some policy recommendations on how to prevent the transmission of bankruptcy risk in QFHG, and how to monitor the QFHG's bankruptcy risk effectively, and how government can play a role during a QFHG crisis and other similar events with protential systemic financial risk.