Bloomberg Notices Credit Guarantees Could Blow Up

No surprise to long-time readers here. Credit guarantees have been the major risk in the Chinese financial system and remain that way today. Newer readers might also want to flash back to 2012: Sinopec Sichuan sales office: King of the loan sharks? Usury scandal may be the tip of the iceberg. Sinopec's sales office was a conduit for taking out low interest loans as part of the 2008 credit gusher and making extremely high-interest loans to property developers.

The risk of credit guarantees has always been a major default, such as what led to the 2015 implosion of HFIG, the state-owned credit guarantee giant in Hebei. The government has always stepped in to prevent a systemic crisis, as it did in Xiaoshan, Hanghzhou in 2014: Rumored Mass Death of Companies in Xiaoshan District of Hangzhou If Banks Collect on Debts; Government Tells Banks to Sit Tight or Leave

Bloomberg: China's Hidden Debt Stirs Investor Angst as Defaults Rise
Small firms that can’t get loans by themselves have been winning banks over by getting other companies to guarantee their borrowings. The companies making those pledges exclude them from their balance sheets, leaving creditors in the dark. Borrowers often extend the guarantees for each other, raising the risk that failures could ricochet, at a time when increasing borrowing costs have already added to strains.

China’s banking regulator has ordered checks of such cross-guaranteed loans, Caixin reported Friday. Scrutiny is mounting after a corn oil producer in the eastern province of Shandong said last month it had guaranteed debt of a neighboring aluminum product manufacturer which is now stuck in a cash crunch. Just days before that, a local government financing vehicle in China’s southwest had to repay an auto parts maker’s loans it had guaranteed after the latter defaulted.

“Disclosure of such guarantees isn’t timely,” said Qiu Xinhong, a Shenzhen-based money manager at First State Cinda Fund Management Co. “Sometimes, it’s like a buried mine and you don’t know when the risks will explode.”
And Chinese businesses are geographically clustered. Local and provincial politics makes for very tight local networks:
“If companies in the same region offer a huge amount of guarantees for each other’s debt, it would form a guarantee web and deepen interconnections among the companies,” said Gang Meng, director of rating at Golden Credit Rating International Co. in Beijing. “If one company has to repay debt for its guaranteed company, risks would quickly ripple to other companies in the web, which will result in a butterfly effect.”
This post has a lot of links to other credit guarantee stories: The Credit Dominoes Are Falling Again; Northeast Faces Deflationary Collapse Without Bailout

Some other big stories covered on the blog:

In 2017: Shandong Bad Debt Daisy Chains Exploding, Loanshark City Falls on Hard Times

In 2014: Who Broke China Bond Market's No Default Streak? Mutual Credit Guarantees

Also in 2014: Steel Trade Lawsuits Explode; Banks' Unceasing Nightmare; Defendants Flee

There is nothing new in the latest news. The question, as always, has been: when does the music stop? At that time, the government will have the choice of allowing a deflationary depression or printing money. Every time to this point has resulted extend-and-pretend in money printing. Hence the view here that when push comes to shove, the cost of bad debt will show up in the devalued renminbi.

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