Debt guarantee tangle: China’s private firms hit by default contagion

13-Feb-2019 Intellasia | Reuters | 6:00 AM Print This Post

The collapse in China of a complex web of debt guarantees involving several private firms highlights risks in its financial system and opens up a potentially hazardous front for an economy in the grip of its slowest growth in nearly three decades.

It is the last thing Beijing needs as it tries to fight off intensifying pressure on growth from a months-long trade dispute with the United States. Yet, as the government steps up economic support measures and moves to loosen gummed-up funding, it might be inadvertently inflaming financial risks with its call on state banks to sharply boost lending to the private sector.

The warning bells are already sounding in the once-prosperous eastern city of Dongying, a hub for oil refining and heavy industry in Shandong province. Here, at least 28 private companies are seeking to restructure their debts and avoid bankruptcy, mainly due to souring loans that they guaranteed for other firms, court rulings seen by Reuters show.

Among the 28 firms are Shandong Dahai Group and Shandong Jinmao Textile Chemical Group, which were on the 2018 top 500 best-run private enterprises in China.

For a private firm to get bank loans in China, especially those in traditional, capital-intensive industries, it often needs substantial collateral or the guarantee of another company. The guarantor itself is very likely to have taken on loans guaranteed by other firms.

The private sector mess in Dongying highlights the inherent dangers in cross-guaranteeing of debt, with defaults quickly cascading across the system when one loan goes bad, threatening to disrupt local financial systems and new lending.

The concern is that Dongying is just the tip of the iceberg as cross-guaranteeing of loans is a common practice across China.

Private firms’ funding options are somewhat constrained because banks are reluctant to lend to the non-state sector, said Yang Zaiping, secretary-general of Beijing-based Asian Financial Cooperation Association, which comprises financial institutions from about 30 countries.

“There is a severe imbalance between private companies’ contribution to the Chinese economy and the financing that they get. They account for 50 percent of taxes, 60 percent of GDP, 80 percent of urban jobs and 90 percent of new hires, but only receive 25 percent of loans disbursed,” Yang, a former Chinese banking regulatory official, told Reuters.

“If private companies don’t have other sources of funds to repay their debts, or collateral, they have to find guarantees, which will add 2 to 3 percentage points to their financing costs,” he said.

https://www.reuters.com/article/us-china-economy-debt/debt-guarantee-tangle-chinas-private-firms-hit-by-default-contagion-idUSKCN1Q107W

 


Category: China

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