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Trusting Chinese financial statements; A case study: Beijing Kangde Xin Composite Material Group

In September 2018, BKXCM (02450 SHE) annual financial statements showed that the company's cash and non-cash short term holdings exceeded Y15 billion, that was sufficient to cover 15x its interest and principal due on January 14, 2019.  The company declined to pay interest on its bonds a few days ago, because of cash flow issues.  It makes you wonder if 90 days ago there really was ever Yuan 15 billion in cash and near cash assets on the balance sheet of KXCM.

The problem is as follows:  There is no concept of audited financial statements in China, the numbers are all essentially "Management's Accounts", which has limited value.  China is not the only place in the world were this occurs (E.G. Turkey) but it's somewhat unusual for a country like China not to have the concept of third-party accounting.

The reason the Y15 billion was never really there is that it's more than likely that the company over-inflated the value of its profits and the difference had to go somewhere. 

The worry here is that currently, China is having "a bit of cold" and that according to official statistics about 2% of bank assets are impared (which is manageable).  Now, had a Chinese bank lent cash to BKXCM, until the day it failed to pay its bond, it would have been seen as an excellent risk, taking into consideration the financial statements that the company provided.  Now cross-default clauses on nearly $300 million of various bonds issues are almost certain to be triggered -- that will at best result in restructuring but could also lead to bankruptcy. 

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