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China Huishan Dairy Holdings (6863.HK) is giving “milking investors” a whole new meaning as shares plunged as much as 90% and raised fresh questions about China debt troubles.

I first explored the Shenyang-based company in May 2016, questioning the wisdom of its cow-leaseback transactions. China’s largest dairy-farm operator was selling about 50,000 animals, a quarter of its herd, to a finance company for roughly $146 million and renting them back. It seemed a long way to roam to procure capital and highlighted how executives were circumnavigating government curbs on risky lending.

Yet the cows may have been the least if it. So says Muddy Waters Capital, which in December announced it was shorting Huishan Dairy and described it as a “fraud” and “worth close to zero.” At the time, company officials dismissed Muddy Waters’ allegations as baseless. Vindication seemed to arrive Friday as Huishan Dairy shares suddenly crashed, wiping out more than $4 billion of market value, and investors scrambled for copies of Muddy Waters’ research.

One element of this story is the buyer-beware dynamic coursing through Hong Kong’s Hang Seng index. It’s mysterious shocks like Friday’s that give the index a lower valuation to many of the globe’s 10-biggest bourses (trading about 13 times reported earnings versus about 22 times for MSCI World Index members). While it’s nice to be China’s financial green zone, Hong Kong is too often vulnerable to the vagaries of poorly-governed mainland companies listed in the city.

Remember the Hanergy Thin Film Power Group flash crash? In May 2015, the solar panel maker lost $19 billion of value in 24 minutes. Seven months later, traders were aghast when Hang Fat Ginseng Holdings cascaded more than 90% in one hour. Ditto for LED maker Tech Pro Technology Development, which in July lost more than 85% in 17 minutes. Now here comes Huishan Dairy to remind us that for all Hong Kong’s spin about being Asia’s premier financial center, the city has a worsening China problem.

That problem was on display Sunday, when the city’s electors chose Beijing-backed Carrie Lam as chief executive over public-favorite John Tsang. Not exactly a harbinger of greater political autonomy, basic freedoms or Hong Kong leaders cajoling Beijing to stop infusing risk into the city’s financial system.

The bigger element of this tale is China’s growing vulnerabilities, all centered around runaway debt and credit. Huishan Dairy’s implosion is directly related to dodgy management tactics and borrowing schemes that make the second biggest economy so unreliable as an engine of global growth and stability. Sure, China is growing around 6.5%, but at what cost? Today’s output is as much the result of borrowed growth as borrowed time.

Huishan Dairy’s cow deals were a window into where shareholders find themselves today. Back when those transactions were making headlines, the International Monetary Fund was warning about shadow banking products resulting in an “elevated” risk of default. In its last annual “Article IV” review, published in August, the IMF warned that so-called wealth management products had surged roughly 50% in 2015. Data show that such efforts by banks to channel credit to local governments, various industries and property developers surged anew in 2016 despite Beijing’s spin about curtailing them. Efforts by the People’s Bank of China to reduce leverage without rate hikes suggest 2017 will be another banner year for credit.

“ Shortsellers have a point about today’s growth ensuring that China’s “Minsky moment,” when a debt-fueled speculative bubble collapses, will be bigger and more spectacular than it ever needed to be. ”

In an interesting bit of serendipity, Kaisa Group is trading again. Never mind the giant debt burden facing the only China property developer to default in overseas debt (in April 2015). Investors can’t get enough of its shares, which soared 80% this morning.

Here’s a sobering factoid from the Nikkei Asian Review: China’s M2 money supply reached $22.4 trillion in 2016, topping the combined gross domestic product of the U.S. and Japan. Mainland bulls ignore the abnormal liquidity reality in an economy that’s just 60% of U.S. output at their own peril. It doesn’t mean China is going to crash in 2017. In fact, President Xi Jinping’s government is pulling out all the stops to keep GDP as close to 6.5% as possible. But shortsellers have a point about today’s growth ensuring that China’s “Minsky moment,” when a debt-fueled speculative bubble collapses, will be bigger and more spectacular than it ever needed to be.

Beijing authorities consistently demonize shops like Muddy Waters, whose founder, Carson Block, has a knack for rousing the ire of governments from Singapore to Beijing. But rather than circle the wagons, officials would be wise to take the hint and boldly confront the corporate governance crisis that’s overflowing into Hong Kong. As more and more investors question opaque companies that look too good to be true, the China Inc. brand will take bigger hits. That runs counter to Xi’s push to raise its global soft power.

Cursed cows, says the old Chinese proverb, have short horns. But it’s the long shadow Huishan Dairy and its borrowed cows are casting over markets that should worry Beijing. Hong Kong investors, too.

Email: william.pesek@barrons.com

@WilliamPesek

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