Hefei Xingtai Financial Holding Group (Xingtai) was asked by the Hefei Municipal Government to provide financial support to a solar power manufacturing company named PanTeng Company (PanTeng). The latter needed a loan of ¥100 million which Xingtai is to act as a guarantor from a commercial bank. The guaranty involves high risks where Xingtai might be held liable for reimbursement. Xingtai is torn whether to grant the guarantee or refuse to do so. If it refuses, Xingtai might be facing challenges with its relationship with the municipal government.
Jiuchang Wei; Lei Zhou; Liqiang Sun
Harvard Business Review (W16008-PDF-ENG)
January 14, 2016
Case questions answered:
- Should Xingtai President Liqiang Sun approve or deny the loan guarantee for Pan Teng? Provide support for your answer.
- Why was Sun not satisfied with the risk management raised by Xingtai managers?
- What key element of the ISO3100 Framework should be addressed in the risk management process for Xingtai to become a comprehensive financial holding platform?
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Hefei Xingtai Financial Holding Group: Risk Management Case Answers
1. Should Hefei Xingtai President Liqiang Sun approve or deny the loan guarantee for Pan Teng? Provide support for your answer.
Due to European and U.S. Anti-Dumping laws affecting solar products, as well as extreme market competition, Pan Teng had to wind down its development efforts, and its exports dropped by 45%. Pan Teng now required a guarantor to facilitate a loan through a commercial Bank. Hefei Xingtai Financing Guaranty had already closed its doors because of the potentially high level of guarantee risk.
Now, the local governing body has pressured Sun to reconsider Xingtai’s stance w.r.t. the guarantee. Ideally, Sun would approve it to appease the government.
But I feel Sun should deny the loan guarantee for the following reasons:
- Primarily to retain its risk management expertise and avoid further violations. This loan guarantee to Pan Teng could well be a precursor to many such violations.
- Although Xingtai can afford the loss that may occur through Pan Teng, being a SIFI in the area, it could not afford to entertain such loans to counterparties with high-risk operations.
2. Why was Sun not satisfied with the risk management raised by Hefei Xingtai managers?
In early 2012, Xingtai was facing 3 major issues.
First, the international economic environment was in serious trouble. The European debt crisis continued to spread and worsen. Domestic macroeconomic regulations and controls remained tight.
With the rumor of a monetary loosening policy that kept the market overinflated, the stock market, housing market, bond market, and external economic environment were not optimistic.
Second, although reforms were implemented in China’s financial industry, the government continued to strengthen its supervision. Therefore, the financing environment was not optimistic, thereby hindering the company’s development.
Third, most subsidiary companies encountered tight cash flows and a scarcity of innovation. The constant expansion of business scale and the financial chain created greater operational risk.
The managers had proposed the following strategies:
- Comprehensive Management: The company’s overall development concept must be unified, and the subsidiary’s execution by instruction should be enhanced.
- Continuous Expansion: Improve its influence in the financial industry in Hefei City and strengthen the relationship with the local government to create more business opportunities.
- Change in Investment Structure: Concentrate on the short-term development of certain enterprises, extending the scope of its financial industry presence.
Sun was not satisfied with these suggestions since he believed many more problems needed to be addressed.
The organizational structure was opaque and complex, making internal coordination and communication difficult for the group. Timely and accurate delivery of important information becomes impossible, and advanced warning at the beginning of the risk is lost, which results in disastrous consequences.
When it comes to continuous expansion to mark its place in the city, the firm must maintain a cordial relationship with the local government. This may, in turn, result in compromising the firm’s risk management stance, just like in the case of Pan Teng.
There were a couple of accidents due to gas leaks and fires in the recent past. The Chinese regulators have demanded that the managers take partial responsibility in such scenarios. Safety Audits and mechanisms need to be brought in place before any further (huge) casualties.
The major source of pressure was the change in Hefei Xingtai’s business environment, which included:
- a moderate change in government policies,
- the ongoing straightening of equity exchanges,
- the exit from the real estate business and
- the removal of Huishang Bank, CCB Trust, and other major financial companies.
Sun felt that there was a considerable direct effect of government policies on the company’s development. The company’s expansion increased pressure on Sun to operate new business units.
3. What key element of the ISO3100 Framework should be addressed in the risk management process for Xingtai to become a comprehensive financial holding platform?
The answer is “the establishing context component, which includes communication and consultation. Your assignment is to establish this context, which hopefully will solve the weaknesses of risk management at Xingtai. You can “google” ISO3100 to get any information you might need. I have 5 major sub-categories, which include “information sharing” and “risk culture development.” You should add at least 3 more to these two and explain them in detail.
In context with communication and consultation being the key element of the ISO3100 Framework, to be addressed in the risk management process of Hefei Xingtai, the President, Sun explains that the importance of successful risk management is to have close contact between the daily business planning, management, and reporting.
He emphasized conducting regular meetings with the senior managers regarding the risk control strategies. In that way, the potential risks can be identified effectively and control the overall management risk.
Xingtai eventually established a risk management and control communication mechanism on a monthly, quarterly, and annual basis, which the risk management committee held to discuss the issues related to the identified risks at the headquarters level.
This mechanism of effective communication and reporting system increased the company’s coherence, enabled the company to achieve no breach of contract, and, along with that, earned a good reputation in the industry.
Concerning ISO3100, the sub-categories that would address the risk management process for Hefei Xingtai are as follows:
- Internal and External audit programs: For instance, in the year 2008, Xingtai implemented a commercial banking system and investment banking system as its core strategy, with two leading enterprises emerging from this strategy (Hefei City Commercial Bank and Hefei Xingtai Trust Co., Ltd). Due to the changes made by the government in its strategic plan, the two companies broke apart, and the company was affected severely. Thus, in this case, external auditing will prevent such loss. Conducting internal & external audit programs will enable the company to compare its risk management strategies with international benchmarks and make necessary changes for effective risk management.
- Risk assessment techniques: Hefei Xingtai, a large financial group, participates in a wide range of business activities. This widespread involvement of the company will expose it to complex relationships and difficulties in determining the risks involved. Due to this complexity, the timely and accurate flow of information is almost impossible. Also, the decision-makers will face hardships in their decision-making process. In this case, effective risk assessment techniques will help the decision-makers identify and understand the risks to control any further risks and assess the control measures that are already in place.
- Monitoring: Sun explained that the company developed its risk management system following the standardized corporate governance structure, including effective supervision. Despite this development, there was something that was left behind nonaddressed. This can be resolved by implementing an effective monitoring system to continually check and observe critically that all the areas are covered and necessary action plans are implemented to increase the business’s performance.
Thus, along with the two identified sub-categories, which include “information sharing” and “risk culture development,” the above are the three sub-categories identified that need to be addressed in Hefei Xingtai’s risk management process.
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