Hebei Credit Collapse: State Owned Credit Guarantee on the Brink as AIG Business Model Falters

"The profit model is an important reason for the large-scale collapse of credit guarantee firms, a 2% profit is not sufficient for taking on 100% of the risk." (Source: Credit Guarantee Firms Go Down Like Dominoes)

The pre-2008 AIG business model of guaranteeing lots of debt for small upfront premiums is still undergoing a full on collapse in China.

Recently the Economic Observer covered the troubles in the steel industry, which are rapidly piling up short-term debt. Although not specifically about Hebei, the province has a large steel industry. It's also in Hebei that Baoding Tianwei recently went bankrupt and it has credit guarantees of its own. On top of it all, the largest credit guarantee firm in the province has been placed in trusteeship as it teeters on the edge of bankruptcy.

Hebei Loan Guarantee Firm Wobbles, Worrying 50 Financial Institutions
The largest loan guarantee company in the northern province of Hebei has been in trouble since investors discovered it did not have enough capital to back its guarantees.

At least 50 financial institutions – ranging from banks and trust companies to securities firms and peer-to-peer lending websites – are worried their investments are in trouble, several employees from those financial institutions said.

The employees said the company has guaranteed at least 50 billion yuan worth of loans. Starting in July, some borrowers have defaulted on their loans and investors have been unable to get repayment from the guarantee company, they said.

...An executive from a fund investment company said it would not have lent to some projects if it were not for the guarantee the state-owned enterprise (SOE) provided.

"These are projects that we normally would not do," he said, "but because they were guaranteed by the company, we took them on anyway."

..."We believe that an SOE will not really default," a manager from a trust company in Shanghai said. "But no one knows how much longer the suspension will last."

As covered in previous posts about credit guarantees, there's once again the risk that one firm can bring down dozens if it indeed goes bankrupt.

Hebei Financing Investment Guarantee (HFIG) is linked with several major companies doing business in the province: 河北最大担保公司河北融投被托管 涉资数百亿
According to the 21st Century Business Herald, in the real estate business, Hebei financial investment with a number of developers have in-depth cooperation, such as Hebei local leading federal estate and housing prices nationwide Greentown Group, Glorious Property, etc., there are Ping An Trust Cooperation Trust, China Australia Trust, Hua Xinxin care, Bohai International Trust and so on. Hebei financial investment and in 2014 for the first time with the P2P platform modular boxes cooperate for the latter to provide financing guarantees for about 500 million yuan.

21st CBH has more in-depth coverage of HFIG: 河北融投担保被指“大跃进” 华融称不当“接盘侠.

The Hebei government has placed the company in trusteeship and created a working group to deal with it. The group is currently investigating the situation and all manner of risky ventures are being exposed. Complicating matters is the fact that HFIG has guaranteed a lot of loans to state-enterprises, so a default by HFIG could trigger a cascade of credit problems for state-owned companies. Credit rating firms recently warned on HFIG, although Dagong gave the firm, which is the second largest credit guarantee firm in all of China, an AA+ rating. There are rumors that bad bank Huarong will buy shares in the firm, which Huarong has denied.

The headline for the 21st CBH article also describes HFIG as having a "Great Leap Forward," and no, that is not a positive even in China. The firm's business model is described as "too radical." With an implicit government guarantee behind it, HFIG was willing to take on any project. The firm rapidly expanded beyond the ability of managers to control it, leading to an unsustainable business model of throwing caution to the wind. One private investor involved with the firm says bankruptcy is highly likely given the firm is already in trusteeship.

Huarong is seen as a possible white knight, but the firm says rumors of its involvement are pure speculation. The company did sign an agreement with the Hebei government in December 2014, but it was a general agreement, nothing specific to the current situation with HFIG.

In addition to the troubles with HFIG and Baoding Tianwei, the first state-owned company to default, there are also private defaults that have hit in April. One was a Shenzhen company that sold its Hunan-style restaurants in order to get into cloud computing. Chinese Defaults Head Into the Cloud
But on Tuesday, struggling restaurateur-turned-technology startup Cloud Live Technology became the first company to miss a principal payment.

The Google Translation will butcher this, but 21st CBH has an article covering several other bonds that are considered at risk of defaulting in 2015: 首例国企债“天威中票”违约跟踪 高危信用债雷区预警

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