Textbook Credit Implosion Underway in Sichuan Province

In Sichuan province this summer, Huitong Credit Guarantee went bust. I covered it here: Largest Privately Run Credit Guarantee Firm in Sichuan Goes Bust
The executives of Sichuan's Huitong credit guarantee have "lost contact" and the status of ¥5 billion worth of loans are up in the air. The offices of the executives were sealed by police on July 9. The firm is the largest privately run credit guarantee firm in Sichuan. The local government is temporarily taking over operations and has instructed the banks to continue working with the firm.

...Huitong has worked with more than 20 banks, several trust companies and even public housing funds. The largest amount of the outstanding ¥5 billion in credit is bank loans, worth about ¥4.5 billion. The rest is with other firms, as well as some loans made directly by the credit guarantee firm. If some loans backed by Huitong are to other credit guarantee companies, legal action by the banks could result in yet more falling dominoes.
Turns out there are a lot of dominoes.

A new article from iFeng (link and Google translation below) details the credit carnage. Thus far there are individual cases in the amount of ¥200 million; ¥200 million; ¥90 million (boss leaped to his death); ¥200 million; and ¥70 million. These all emerged in September and October, with the trust/ investment company bosses going missing, committing suicide or being apprehended by police.

Due to the wild growth in the private fundraising/shadow banking sector, it's expected that losses will continue emerging into the middle of 2015.

Credit growth has completely halted. From the article below:
"I'm sorry, now there is no financing available for investment projects." "Now the main task of the company is to complete existing projects, only manage the existing capital, not grow it." Reporter walked into a number of financial companies, the answer is the same.

At the office of Chengdu's (capital of Sichuan) Xida Financial Supermarket Building 3, you can still rent empty space for ¥80 per sqm. Others who moved in early are paying ¥260 per sqm; prices have collapsed 70%. The sales agent tells the reporter, "If you don't believe me, I'll show you other companies' rental contracts, but you have to keep it a secret. If you can move in before November 8, we can discuss the price further."

Rent no doubt was high due to growth in investment management/ advisory firms. At end of December 2013, there were nearly 5,000 of these financial firms, an increase of roughly 4000 from June of the same year! Sichuan's provincial government counted 509 firms involved in credit guarantees at the end of 2013, with a ¥233.8 billion guarantee balance and 730,000 households served, making Sichuan province the second largest market in the country. Central bank data from the end of June 2014 counted 326 small lending companies in Sichuan, ninth in China, with ¥59.7 billion in loans, fourth in China.

41.4% of western Chinese SMEs need credit and 57.2% of those credit needs are met with private fundraising (shadow banking). Average interest rates are 19.1%, well above the 9.7% annual rate for bank credit. Since they have no credit guarantee or collateral, 72.1% of small businesses are forced to use private fundraising. In Chengdu, there are investment products on the market today offering 15% to 18% returns, well above the 7% offered by bank trusts and WMPs.

Are you ready for the punchline? One insider estimates that 80% of this private credit flowed into real estate. Thanks to the rapid growth of the real estate industry, some developers were (successfully) paying 100% annualized interest rates and even the common people were spoiled, with investors refusing to even look at wealth product yielding under 20%.

Real estate investment has actually ticked up in the second half of the year (through the September data), but the cooling market is wreaking havoc among high interest rate debtors. I would not bet on that number holding up in the coming months.

This is a textbook credit bubble, with explosive growth right before the peak. The 400% growth in investment firms in the last 6 months of 2013 is off the charts. The major domino in the private fundraising market fell in July 2014, and the knock on dominoes started going down in September and October. Real estate investment hasn't contracted yet, but it likely will. Then it may take a few more months for the suppliers to get into trouble, later the construction equipment companies that sold cement mixers and excavators on credit may find they have bad debts on their balance sheets. This credit bust is still in the early innings......


Editorial / private finance disorderly barbaric growth, after experiencing the baptism of the market will eventually return to normal, but the decline came so fast, the price is so great beyond people's expectations. Following the typical private lending Erdos "crash", "Unable to honor", "foot", as began to spread like infectious diseases in the western provinces.

Prosperity comes from private lending business "money shortage", from civil narrow investment channels, if the regulation in place, used properly, is indeed a win-win situation, but it is irrational high returns, whether investors or intermediary investment companies, security where companies are ignoring the risk of loss of the normal logic, in not strict regulation, the acts recklessly with usury, financial fraud, illegal fund-raising tangled.

Into the general trend of macroeconomic adjustment period to allow real estate, coal, high profit industry weaken, barbaric growth of private lending immediately from the helper becomes an accomplice, pushed higher operating costs in accelerating the "cash cow" of the fall. Capital is a double-edged sword, especially in increasingly large private capital, without a proper regulatory measures and risk control system, "one will die, and disorder," the trajectory of converting avoided.

Line survey

Sichuan and Shaanxi barbaric growth of private finance private lending chaos

Since July this year, suffered a "Land of the secured events" hit Sichuan private finance still aftershocks, all kinds of financial companies and intermediary company funds strand breaks in frequent cases, the boss running, lost contact, was arrested in Sichuan became the private lending circles the norm.

Land of events before and after the warranty, Sichuan East Land of finance and investment advisory Co. actual control 夏小龙 private lending after wantonly lost contact, involving funding of more than 200 million yuan. September 4, Financial Street is located in financing private companies linked to financial supermarket Xin accident, the amount of private loans brokered by about 200 million yuan; September 12, inner-Xin finance financial shareholders Lee jumped to his death, pass death with their company into a high debt related to the financing of its 12 projects total more than 90 million; September 30, Sichuan Fortune Union was unable to honor the principal, chairman 袁清和 be seized and turned over to local investors, the Finance Office, involving an amount of over 200 million Yuan; October 8, P2P platform platinum Elijah unable to cash, then its owner lost contact after 90, involving an amount of 7,000 million.

Former finance companies gathered in Chengdu Jinjiang East Main Street has become the hardest hit, these companies now have running, and some were closed down and barely even have a precarious business.

Take on this is known as Chengdu folk Financial Street street, once everywhere and always miss any opportunity to disseminate leaflets to passers financial adviser has now disappeared, even if you take the initiative into these financial companies store, in twos and threes employees listlessly sat at the computer, to come in could not have been enthusiastic investors.

Meanwhile, Shaanxi, Gansu also exposed investment companies, security companies, "foot" of events in some of them have been identified as financial fraud, illegal fund-raising, and some have not yet identified the nature, number and amount involved which are still Approved in.

Barbaric growth

"The number of financial intermediary company has an accident nearly home, and will continue to increase, because most investment banking firm (intermediary companies) are set up in the past three years, the period of the project in one to two years in the majority, by the end of this year the expiry of the peak of the project, there will be more projects funding problems arise, this situation will continue until the second half of 2015, during which seven or eight percent of the company is immune to get through the next Depression. "Chengdu High-tech Zone, general manager of City Bohai Co., Ltd. Yang Xiaobing, said small loans in the "China Business" reporter interview.

"I'm sorry, now there is no financing available for investment projects." "Now the main task of the company is to complete existing projects, only the stock, not incremental." Reporter walked into a number of financial companies, the answer is the same.

East Main Street par Jinniu traditional financial district of West Main Street West financial supermarket, a key planning Jinniu government financial center, is also a deserted.

Oct. 31, at West 3rd floor office area financial supermarket, as the West's investment in financial supermarket operator, with the Swiss Chengdu Asset Management Limited, a staff member told reporters, "originally scheduled for November 8 officially opened the West Large financial supermarket, on the first floor where there is still a pavement available for rental by, the opening day there will be a lot of leadership over the scene in order to look good, as long as the guaranteed settled before November 8, 80 yuan a square meter price can rented, while other companies have settled contracts signed are 260 yuan one square meter. "

See reporter hesitant, the staff member said: "If you do not believe that I can sign a contract other companies to give you a look, but rents have to be able to move into the secret as long as November 8, the price can be even longer. discuss. "

According to the Sichuan Banking Bureau data show that as of the end of December 2013, Sichuan Province (financial) information on the number of owned financial advisory class has risen to 5000, representing an increase of nearly the end of June the same year, 4000, according to industry sources, such The company's growth was mainly from the start of the second half of 2013, "Sichuan province's average daily new investment (financial) capital financial information consulting company nearly 20 class."

Sichuan Provincial Finance Office data, as of the end of December 2013, Sichuan has a financing guarantee company 509, the annual total financing guarantee balance reached 233.84 billion yuan, involving 730,000, ranking second in the country. Central Bank data show that as of the end of June 2014, a total of 326 small loan company in Sichuan Province, the number of ranks ninth; loans were 59.73 billion yuan, ranking fourth in the country.

"41.4% of SMEs have credit demand in the western, this ratio is higher than the eastern, central, 57.2% of corporate financing mainly through private lending." In the 2014 financial west Internet Forum, held October 30, Southwestern University of Finance and Economics Gan plow household financial survey and director of the China Research Center where the team released their latest research results, "and therefore the rapid development of private lending."

"Western region has an average annual interest rate of 19.1% private financing, much higher than the 9.7% annual interest rate of bank financing." Plow Gan said, "but because of unsecured and mortgage, 72.1 percent of small and micro enterprises in the western region can only passively quit bank credit markets and the choice of private financial institutions. "

The reporter interviewed a few days by a number of financial investment in Chengdu, financing guarantee companies, find financial products available in the market in Chengdu annual revenue ranging from 15-18%, much higher than the banking channels were about 7 percent of annual revenue.

A lot of private financial companies hastily, private lending blank legal norms, the absence of financial regulation, weak regulatory power, information disclosure mechanism is not perfect, have increased the potential risks of private finance in Sichuan.

"Relying on high-profit resource development as well as the real estate market, Sichuan private financial markets in the past three years, ushered in the era of huge profits, the second half of 2011, Sichuan Colleges Senior Seminar participants have to hold together, to enter the private financial sector to the economy as a link students have set up investment companies, and with the transfer of the national financial risks, the second half of 2013, Henan, Jiangsu and Zhejiang as well as private financial players in Chengdu. "An industry source told reporters.

Wind out of position control

In Eagle guarantees represented a partial guarantee companies use affiliates do bureau since the financial model, the project does not rely on the "Western Bay" project creators Xichu folk group, as well as fictitious borrowers, illegally funding Sichuan Fortune Union, are exposed out of control in terms of the lack of wind, the market is expected to miscarriage of justice.

"Expects 80 percent of private lending that money goes to the real estate industry." As industry practitioners, Yang Xiaobing gives his own judgment.

"The rapid development of real estate a few years ago decided to assume its high interest rates, annual interest rates of 100% and some real estate. And people are also real estate 'spoiled', and less than 20% of annual income financial products simply look down, finally led to the real estate industry to absorb a lot of money. "Gan plow representation.

"In the last 10-15 years, the return on investment in real estate projects than any one industry can not, in recent years the country has restrictive policies on real estate development, the limited amount of funds flowing formal financial institutions real estate market, real estate companies forced financing to private financial institutions, which pushed up the private financial markets overall level of interest rates. "Deputy Director of Investigation and Research Center Xinancaida Chinese household financial Tan Jijun this view also agrees.

The economic downturn, the real estate industry into a period of adjustment, it will become a private financial crisis exploded in Sichuan last a fuse.

October 23, Sichuan Province Bureau of Statistics data show that the first three quarters of Sichuan province's GDP (GDP) 20681.54 yuan, calculated at comparable prices, an increase of 8.5%. The first three quarters of the total fixed asset investment grew 12.8 percent. Among them, investment in fixed assets (excluding rural households investment) growth of 16.1%. And in the first half and a quarter of these two indicators were: 13.0%, 17.3% and 13.0%, 17.4%. Showed a downward trend in investment growth.

From the look of real estate development, real estate development investment in Sichuan 325.77 billion yuan, an increase of 15.9%, the growth rate increased 0.4 percentage points higher than the first half.

Although the real estate investment growth picked up, but that does not mean the real estate industry began to improve. Soufun data also show that in September 6138 in Chengdu sets of commercial housing turnover, fell 2.73 percent last month, down 18.15 percent from last year.

With cool the real estate industry, the high interest rate of private lending has been difficult to sustain.

"According to our statistics, the average small and micro enterprise financing interest payments reached 20.9%, while private lending company is actually financing costs are too high, for profit, private financial institutions at higher interest rates will inevitably lend out money, typically 30% some even as high as 40 percent. "Gan plow expected.

The summary table borrowings reporter obtained a copy of a corporate entity also showed indeed true.

Summary Table borrowings revealed that the enterprise funds derived from private lending interest rate of around 35% on average, and some even as high as 120 percent loan, and the list shows that financial guarantees class Xinxin guarantees, Hun Sen finance, investment, gold Winlink The company has financial dealings with the company, but also many loan interest rate between 42-48%. Eventually the company also discontinued due to funding strand breaks.

"Not many of the real economy can withstand such high financing costs, so these funds mostly invest in the real estate industry, and is a high risk real estate projects, usually some three or four lines of real estate. If the overall real estate industry, a sign of trouble, These real estate projects are prone to problems, but private wealth management, security agencies can not digest such a high interest loan, so it makes financial institution CEOs foot Chengdu frequent incidents. "plow Gan said in an interview with reporters.

Industry "phantom"

Also in the west Xi'an recently broke out investment company "foot" event, once in the private capital lending market burgeoned in Xi'an, Shaanxi World Investment Ltd. (hereinafter referred to as "co-investment in the World"), closed down overnight responsible person threw many investors (investors, according to an internal company out of the accounts of the calculation, the final number of police statistics still) missing. Almost at the same time, the Bank co-investment in Shenzhen, Lanzhou, Qinghai Province, Jinan, Chengdu, Xianyang Hing equal branch are all closed their doors.

Sichuan-based financing in the real estate industry is different, Shi-investment projects presented to investors mostly industrial, surviving co-presentation of investment, the company has assets of 1 billion yuan scale group enterprise, its industry, including the world together to facilitate United States Ting styling, the Department strongly Express (later renamed: World Games Express), the World and home, more than 40 separate legal entities.

It is understood that individual investors less Xi'an voted two or three million, there are many millions of dollars, in addition, the contract signed by the investor are different, most people's contracts are "loan guarantee contract," appears in the Contract borrowers Shaanxi Imperial Real Estate Development Co., Ltd. Shaanxi Dachang, including Shi-investment identity secured party (Party C) appeared, as well as a small part of the sign is "credit assignment agreement." Bank co-head of investment over the current chapter is wanted by the police in the state.

It is understood that before the "foot" of September Zhang Chao told investors that said: "We plan to invest the world together to fight a P2P (net lending platform), half the time it enables operators to return to normal, we present Gold benefits can be sustained. And in 2015 will start listing. "

"Co-investment operations alive a year later, the company will soon have accumulated a lot of money, this time Zhang Chao's ambition is also growing." A former World co-investment internal staff told reporters, Zhang Chao do some entities do Diversification put some big shop stalls.

However, according to the World Group Investment insider sources, the project entity Shi-investment operations, including the shop, acquisitions and other capital consuming far outside quite that big.

Shi-investment have left an executive told reporters, Shi-source project investment entity may want to pursue the establishment of the chapter over the previous white shark Heavy Industries Co., Ltd. in Xi'an.

According to its introduction, said Zhang Chao first is the agent Zoomlion and other mechanical equipment. Prior to 2011 the establishment of the Xi'an Heavy white shark, Zhang Chao has established over the construction machinery company in Qinghai and Gansu.

"Now the real estate industry downturn, engineering back section is very slow, with Zoomlion and other enterprises increased supervision, Zhang Chao made construction machinery financial leasing has also been greatly affected." The source said that only in Lanzhou two banks, there are more than 50 million yuan Zhang Chao debt.

For the number of people involved and the amount currently Xi'an police failed to give a clear answer. But there are investors from the world get a close internal investment accounts, including Shaanxi, more than 1,300 investors involved, yet payment of principal more than 200 million yuan.

At the same time, the Bank co-investing in Gansu investors also chose to report, November 3, Lanzhou Municipal Public Security Bureau held a news conference, said that as of October 30, Lanzhou police have received 404 victims of the masses of people, victims of the mass loss totaling 46.91 million yuan, Lanzhou police cooperation for the World alleged illegal deposits from the public investment in the case of the establishment of a task force.

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