Fitch puts Baidu on negative watch over shadow banking – Financial Times

Fitch Ratings has put Chinese technology giant Baidu on “negative watch” for a potential ratings downgrade as a result of its growing shadow banking business.

China’s rapid credit expansion and a lack of diverse investment options has led to individuals, banks and companies investing excess cash into shadow banking products — most notably Wealth Management Products (WMPs).

WMPs bundle together investments into money market bonds, corporate loans and many other products, all of which are usually a mystery to the buyer.

Baidu, China’s dominant search engine, has been getting into the WMP game by rapidly expanding its Financial Services Group, which Fitch says is increasing Baidu’s overall business risk.

Operating profits have continued to slide at the technology company in recent quarters. It has struggled with making the transition to the world of mobile internet, and suffered a highly publicised scandal last year as a result of its reliance on revenues from medical advertising — some of which comes from dubious medical outfits.

Fitch said it was particularly concerned about the reputational risk to Baidu if any of the WMPs it is selling fail to meet its target returns, or default.

“As with Chinese banks, Baidu does not need to set aside large capital against potential defaults on its WMPs … WMPs have become an alternative form of financing for projects or investments that would not qualify for bank loans,” Fitch noted.

Baidu’s Financial Services Group assets more than doubled to Rmb25bn in the year leading up to April 2017.

Fitch added that Baidu’s credit risk compared well with western internet peers such as eBay and Expedia, but was worse than its domestic competitors in China’s tech trinity – Alibaba and Tencent.

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