• China Dairy Company

China Dairy Company (Photo : Getty Images)

The Chinese government came to the rescue of China Huishan Dairy after shares of the Liaoning-based dairy company dipped 85 percent in just an hour on March 24, which wiped out more than $4 billion from its market value.

The Hong Kong stock exchange said that the Huishan Dairy shares crash, the biggest stock fall that day, caused the suspension of trading that Friday. It also affected firms connected to the dairy company, qz.com said.

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On March 28, the company issued a statement to the Hong Kong stock exchange, saying that it had failed to pay the interest to its creditors at credit crunch.

The company said that it met with the Liaoning government and more than 20 of the creditor banks to save Huishan Dairy and talk about remedies on March 23.

Based on the action plan proposed by the Liaoning government, the overdue interest payment will be resolved within two weeks. The local government will also help the company with its liquidity issues within a month.

During the meeting, some creditors, such as Bank of China and Jilin Jiutai Rural Commercial Bank assured the company that "would continue to have confidence in the Group [Huishan] which has over 60 years of operating history".

The company also denied reports that it had issued false invoices and that its chairman, Yang Kai, had spent funds on a real estate in Shenyang.

Huishan, however, confirmed reports that Yang's wife Ge Kun, who is also the company's executive director in charge with the principal bankers, has been away since March 21, when Yang learned of the late payments.

A report by Caixin said that the Liaoning government will pay more than 90 million yuan ($13 million) for land owned by Huishan to provide the company with cash. Financial institutions involved with Huishan were also told not lower the company's credit rating or file lawsuits against the company.

Yang reportedly promised to sell some of his shares in the company to raise 15 billion yuan to solve the liquidity crisis, Caixin said.

Since last year, Huishan has been a target of short-seller, including hedge fund Muddy Waters. However, before its stocks fell last week, its stocks were one of the most stable.

The company's profit has been declining in the past years, due to drop in milk prices amid a global oversupply.

According to the report, the Chinese government would not allow Huishan to collapse as it could discourage credit markets, which are already doubtful of its local authorities.

Last year, Liaoning officials were found to have faked the data on the province's GDP growth from 2011 to 2014. Huishan's failure or collapse would be damaging to some Chinese banks, especially the company's creditors.