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International bondholders who owe tens of millions of dollars to a Beijing-backed semiconductor group seek to freeze overseas assets, as corporate debt issues complicate President Xi Jinping’s attempts to free China from overseas-made chips.

Tsinghua Unigroup, a national chip champion backed by China’s most prestigious engineering school, defaulted in November on a bond issued in the country, raising concerns over cross defaults on offshore banknotes worth of about $ 2.4 billion.

The state-backed company is at the heart of Xi’s efforts to achieve self-sufficiency in semiconductor production. The United States has banned Chinese companies from accessing overseas-made chips amid wider tensions between Washington and Beijing. But now Tsinghua’s troubles threaten to embroil a handful of China’s largest computer chip companies, either which it owns or in which it has stakes.

Lawyers representing a group of Hong Kong-based Tsinghua bondholders released a statement of claim in the city’s high court in February, according to documents seen by the Financial Times. This marked the first step in “putting offshore assets on hold” held by Tsinghua before any move inside China to restructure the company, said a person involved in the case. If successful, the order could prevent Tsinghua from selling offshore assets and using the proceeds to pay off debts in China.

“If we can do this, then these [assets] should not go into onshore restructuring, ”the person said, adding that the exact value of Tsinghua’s offshore assets was not clear and the company had also not released plans to tackle its problems. debt.

Tsinghua did not respond to requests for comment from the FT.

Tsinghua’s liabilities as of June 2020 stood at 202.9 billion Rmb ($ 31.2 billion), with about a quarter of that amount owed by the middle of this year, according to Debtwire data based on deposits from companies.

Graphic showing Tsinghua Unigroup's huge debts

The group’s debt problems also shed light on Zhao Weiguo, chairman of Tsinghua. The aggressive trader, who spent his life as a shepherd in western China’s Xinjiang region studying at Tsinghua University, made his fortune in real estate and bonded with members of the high level of Chinese government.

Under Zhao, whose Beijing Jiankun Group owns a significant stake in Tsinghua, the chip group embarked on a multi-year deal frenzy that included the purchase of French chipmaker Linxens as well as a controlling stake in Hewlett-Packard’s H3C data networking company. Multi-billion dollar bids for US tech groups Western Digital and Micron Technology have failed.

Zhao’s investments coincided with Beijing’s intensified efforts to break free from dependence on overseas-made computer chips. In 2017, Tsinghua secured $ 22 billion in new funding from public investors to help fund semiconductor-related acquisitions.

Tsinghua is building the chip empire through aggressive mergers and acquisitions

But it’s unclear whether Xi’s administration would bail out Zhao, analysts said.

According to Cercius Group, a Montreal-based consultancy specializing in elite Chinese politics, Zhao enjoyed state support during Hu Jintao’s administration and he continues to have a close personal relationship with the son. from the former president, Hu Haifeng. But there are tensions between Hu Jintao and current President Xi, obscuring the picture.

Six China-based analysts declined to comment on Tsinghua’s debt situation to the FT.

Douglas Fuller, an expert on China’s industrial policy in the chip sector at Hong Kong City University, said Tsinghua was ultimately “a bad choice as a way to build China’s chip industry. fleas”.

Fuller believes the group has “overpaid” two chip design groups, Spreadtrum and RDA Microelectronics. The pair were eventually merged into an “underperforming” unit, he added.

ChangXing Memory Technologies and Yangtze Memory Technologies, two major chip subsidiaries of Tsinghua, “should prove viable. . . but they won’t be moving any of the major global players in those markets anytime soon, ”Fuller added.

The group’s challenges are not specific to the sector. A Chinese chip official from a group unrelated to Tsinghua said companies and local governments were struggling to find new funding for the industry. “So far there is no opportunity to profit. It is very difficult to maintain cash flow. I don’t know how long we’re going to last, ”he said.

Foreign holders of the Tsinghua bonds say part of their motivation for initiating the Hong Kong legal process is to try to instill more transparency on the part of the company.

The case is also complicated by the difficulties foreign investors face in taking on debt with groups based in China, even Hong Kong, which is increasingly under Beijing’s control.

“There’s not a lot of protection we can get, the company being an onshore entity – the offshore legal structure doesn’t work onshore,” said the person involved in the case.

Legal proceedings are also expected to be closely watched by other investors in Chinese bonds issued overseas from the mainland. Chinese non-financial firms owe $ 575 billion in offshore dollar-denominated debt, with $ 72 billion maturing this year, according to genealogical data.

Much of the borrowing comes from the real estate sector, which has $ 34 billion in bonds maturing in 2021. China Fortune Land Development, which specializes in industrial parks, defaulted this month on a bond of 530 million that counted BlackRock and HSBC funds among its investors.

Additional reporting by Sherry Fei Ju in Beijing and Qianer Liu in Shenzhen

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