Shedding of the Asian Snake’s Skin, The Opportunistic Tunneling of Corporate Wealth

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Shedding of the Asian Snake’s Skin, The Opportunistic Tunneling of Corporate WealthDuring the 1990s in the city of Yichang, Hubei province, central China, you are considered a god if you are a “Monkey King” – if you work at the Monkey King Group (MKG) (宜昌猴王焊丝有限公司). MKG was a Shenzhen-listed industrial powerhouse as one of China’s 512 key SOEs (state-owned enterprises) and formerly China’s #1 maker of welding materials. Around 14 years ago, at the end of 2000, the parent company of MKG was placed in liquidation.The MKG case reminded us about the technical default saga of Shenzhen developer Kaisa Group Holdings (1638 HK). Bondholders and investors in earlier cases were burnt – investors in Suntech, Ocean Grand Holdings, Celestial Nutrifoods and China Milk Products Group got 5% or less, while investors in Asia Aluminum Holdings, which collapsed in March 2009 with $17.7bn of debt, received about 7%. Sino-Forest debtholders recovered 17%.

Like Kaisa and many of the Asian companies, MKG had guaranteed the loan of its parent company who had used the money to speculate in the stock market, property and speculative ventures. In Dec 2000, MKG started an accounting “tunneling” exercise that shrunk group assets from RMB2.42bn to RMB371m, according to its biggest creditor Huarong Asset Management who bought RMB622m in MKG debt. Tunneling is the very reason why the recovery amount is always a small fraction of the audited net asset value, and the reason why western-style financial statement analysis, the elaborate spreadsheets of net-net asset value etc, break down as garbage-in-garbage-out exercise in the Asian capital jungle.

Loan guarantees presents a seemingly innocuous Opportunity to maliciously tunnel out corporate wealth in Asian companies.

Take the case of Olympus. It deposited ¥21bn in Japanese government bonds with LGT Bank and arranged for the bank to use these bonds as collateral for a loan to two shell companies, the “tobashi”. The unconsolidated shells in turn used the borrowed funds to buy the toxic investments from Olympus at the original cost. Olympus recorded the amount it deposited with LGT and the toxic assets were considered “sold” to the shells, thereby avoiding recognizing losses on these underwater securities. In other words, Olympus acted as a guarantor of loans made by the banks to the shells by depositing funds at the banks equal to the amount loaned (figure on left).

Loan Guarantee

(L): Olympus accounting: DR Government Bonds ¥21bn, CR Cash ¥21bn; DR Cash ¥21bn (from the shells), CR Toxic Financial Assets ¥21bn (“sold” to shells); (R): Photo of MKG plant in the 1990s

Hence, cash in the balance sheet in Asian companies is invariably never really cash unless one examines these related-party transactions (RPTs), often held in scant regard by investors using western-style financial statement analysis and by Asian auditors. Even in Singapore, the Qualification Programme (SQP), a post-university professional accountancy qualification, does not cover at all the auditing of RPTs which is all-important in the Asian capital jungle.

The Monkey King is just one of the many brief cases that we will be sharing in Week 4 of the Accounting Fraud in Asia course in SMU. Last week, we have discussed about the Incentivized Asian “Wedge” Snake with indirect measurements of accounting tunneling using the complex and opaque corporate structures set up by the controlling owners. This week, we are making the breakthrough to explore the Shedding of the Asian Snake’s Skin: The Opportunistic Tunneling of Corporate Wealth with the direct measurements of accounting tunneling.

This Week #4 is a breakthrough in the sense that we are exploring new frontiers that have NOT been discussed even in top-tier accounting and finance research journals since the Asian Snake has adapted itself to escape the various measurements devised by researchers and practitioner. Take loan guarantee which has shifted to intercorporate loans, classified under “Other Receivables”. With some reforms mitigating these RPTs, the Asian Snake has adapted and shifted to other accounts in disguised forms. Hence our earlier article for a sense of urgency to develop a new composite measurement of tunneling. We will be dissecting both actual and potential real-world Asian accounting cases in this week and we’ll observe up-close the process in the shedding of the Asian Snake’s skin and the accounting transgression skin left behind.

PS: Our monthly Moat Report Asia will be out in the week of 6 February.

Warm regards,


The Moat Report Asia

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Bamboo Innovator Daily Insight: 26 Jan (Mon) – Questions that will help you find your purpose in life: What makes you forget to eat? How can you better embarrass yourself?


  • Questions that will help you find your purpose in life: What makes you forget to eat? How can you better embarrass yourself? Quartz
  • Tycoon’s bold strokes in paint; Goh Cheng Liang has made a mint in businesses ranging from health care to instant noodles, but his decision to return to his first big score – paint – has made him Singapore’s wealthiest person: ST
  • Cheap and cheerful: After some teething troubles, frugal innovation is on the rise: Economist
  • What CEOs Say.and What They Mean: StockViews
  • Busting graft: Tone from the top is key; How can CEOs build and sustain a graft-free corporate culture in today’s business environment? BT
  • Frederick W. Taylor: Time Management Skills: Farnam
  • The most important skill in science or self-improvement is noticing the unexpected. Farnam


  • Steal Like an Artist: 10 Things Nobody Told You About Being Creative: Amazon

Investing Process

  • Human investment managers risk obsolescence: FT
  • Buffett Wisddom That You May Not Have Heard Before: MI

Greater China

  • The great sprawl of China: How to fix Chinese cities: Economist
  • Skiing: To the piste! To satisfy skiers, China is covering its arid hills with snow: Economist
  • China: Monopoly position; Architect of Beijing’s antitrust laws says they are being used in a turf war between regulators: FT
  • Disenchanted Hong Kongers are preparing to escape Beijing’s rule: Quartz
  • Obesity problem in China balloons out of control: WCT
  • Mobile internet in China booms as users reached 1 billion: WCT
  • Confusion abounds over China’s emerging credit reporting industry: SCMP
  • Row over fees gives glimpse into Beijing-backed takeovers: SCMP
  • Taiwan’s Odds Of Opening The Next Backdoor To Restricted China Stocks: Forbes
  • Japanese rice: the new, safe luxury food in China: Reuters


  • Vibrant Gujarat: High on solar energy: Forbes
  • Ghost employees and vanishing finances; Indian bureaucrats, some may argue, are second to none in devising newer methods of corruption: Pioneer
  • India turns to corner shops, mobile phones for banking revolution: Reuters

Japan & Korea

  • Samsung expected to repeat success of memory biz in system semiconductor biz: Maeil
  • Korean virtue of ‘jeong’ still works; Foibles of status and prestige that infest modern life aren’t the virtues that helped Koreans get to where they are and won’t be the virtues that will help them go where they want to go: KT
  • Korea’s exports of instant noodles to Japan plunge: KT
  • Lotte runs Japanese units independently; Lotte Group Chairman Shin Dong-bin said he will not take management control of affiliates in Japan following the unexpected dismissal of his elder brother : KT
  • Smart’ factory touted as an industrial model; Korea’s largest “smart factory” is at LS Industrial Systems (LSIS), one of the nation’s largest cable makers. : JA
  • Shinsegae sets out to overtake Lotte: KT
  • Investors rediscover the Kosdaq: JA


  • Telecoms in Myanmar: Mobile mania; One of the last great “unphoned” territories opens up: Economist
  • Joko Widodo: 100 days as president: AsiaOne
  • Investors in gold scheme in Singapore ; Not only is its owner uncontactable, but the company’s office at Keypoint in Beach Road has also been closed.alarmed by firm’s silence: AsiaOne
  • Vacancy rate for private homes in Singapore at 10-year high: AsiaOne
  • Case of the S$2 mln furniture vouchers grips Singapore property market: Reuters
  • A third of traditional Chinese medicine (TCM) stores as well as one-fifth of TCM practitioners are in danger of folding when GST is implemented in Malaysia: AsiaOne


  • Anne Stausboll, Calpers CEO: the $300bn woman; The mighty US pension fund boss squeezing fund managers’ fees: FT
  • Andrew Left, Sahm Adrangi NPR Interview: We’re Short America: NPR
  • Dodging peril: Instead of uniting China and the West, jihadist violence risks further dividing them: Economist
  • Foreign investment in Africa: A sub-Saharan scramble; Private-equity investors are getting hot for Africa. Businesses there need all the capital on offer, and more: Economist
  • Rousseff’s dream of Brazilian shipbuilding titan in deep water: FT
  • Saudi Arabia: Threat from Isis will only grow; The internet, more than bombs, could be the government’s undoing: FT
  • Let statisticians cry foul when politicians bend the truth; Those responsible for government numbers should not be working for ministers: FT
  • Rise in second jobs makes UK a nation of grafters; Falling real incomes explain wave of industriousness: FT
  • Why Two Big ETFs Are Shrinking: Barron’s
  • Can Managed-Futures Hedge Funds Revive?: Barron’s
  • Hedge Funds Learn Secrets Not So Safe; Data Providers Let Banks, Brokers Know What Reports Subscribers Read: WSJ
  • Markets Get Bumpier as Fed Withdraws Safety Net: WSJ
  • British builders lose £2bn a year as clients fail to pay: Telegraph
  • What happens after shock and awe of QE subsides?: Telegraph
  • Stanchart shares tumble on reports CEO to be replaced by end of the year: SCMP
  • Banking – the ultimate dead-end job; Why work for a gloomy bank when you can work for a Palo Alto company that … is trying to change the world?: SCMP

Energy & Commodities

  • America’s oil industry: The tough get going; Amid the gloom and cutbacks in the industry, the strong will get stronger: Economist
  • With King Abdullah’s death, new realities may force Saudi Arabia to change oil policy: FP
  • Oil collapse could trigger billions in bank losses; Huge expansion in leveraged loans to oil and gas sector in recent years suggests heavy losses from defaults: Telegraph
  • Commodity financing exposure in Asia-Pacific hits banks hard: SCMP


  • Spotify for books: Authors and publishers may constrain the rise of e-book subscriptions: Economist
  • Meet The Man Behind Microsoft’s Ambitious Vision For The Future Of Computing: BI
  • GoPro just changed what live sports are going to look like: Quartz
  • Box IPO: The $120 million that got away: Fortune
  • Who is Alibaba’s biggest shareholder? Clue: they invested 14 years ago: Technode
  • [Korean Startup Interview] US$1B Valued Yello Mobile Cherry-picks Best Mobile Apps: Technode
  • Israel Grows From Startup Nation To Exit Nation: Techcrunch
  • Investors Want Proof You’re High Fantasy: Techcrunch
  • Mozilla Wants To Bring Virtual Reality To The Browser: Techcrunch
  • New Tricks for an Aging Microsoft: WSJ
  • Inroads Made by Apple Pay Propel ‘Mobile Wallet’ Idea: WSJ
  • Why Apps for Messaging Are Trending: NYT
  • The smart money now seeking pre-IPO investments in tech start-ups: SCMP
  • Delivery van-booking apps seen having good prospects in Asia: BT
  • Inroads Made by Apple Pay Propel ‘Mobile Wallet’ Idea: WSJ


  • Vaccine Skeptics on the Rise; Latest Measles Outbreak Shines Light on New Trend Worrying Health Officials: WSJ

Consumer & Others

  • Britain’s bold move on plain cigarette packaging; UK is right to ban all promotional graphics in the sale of tobacco: FT
  • This is Origami—Starbucks’ single-use pourover kit in Japan: Quartz
  • America’s best-selling cars and trucks are built on lies: The rise of fake engine noise: WaPo
  • Catalogs, After Years of Decline, Are Revamped for Changing Times: NYT
  • Car makers must prepare for the obesity epidemic; Ford’s “futurologist” says vehicles need to adapt to cope with the ever-expanding human body: Telegraph
  • Snowboarding falls out of favor on U.S. slopes: JT
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