2014-07-08

Credit Guarantee Nightmare; How The Qingdao Port Scandal Goes Viral

Back in mid-June I posted Credit Guarantee Firms Go Down Like Dominoes. I wrote,
Credit guarantee firms are a nexus point in the credit bubble. All manner of over leveraged borrowers (think rehypothecated copper and steel) with no experience in the credit market started or invested in credit guarantee firms. These firms helped marginal borrowers obtain credit, and some of them opened their own credit guarantee firms. Most recently was the story of Beijing residents going to credit companies for real estate spec loans. They can also serve as the link between companies' mutual credit guarantees, such as the web of guarantees seen in a city like Xiaoshan or among the steel traders, who all opened credit guarantee firms and guaranteed each others' debts.

In the article below, it gives Wenzhou as an example. 90% of the credit guarantee firms have closed or gone bankrupt. Zhejiang province's bankruptcy case load jumped 145% last year and the amounts involved jumped 600%. This year is expected to be worse.

This quote sums up the situation (and does this not bring to mind AIG): "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."
Click through to see that Chinese article. Here is the SCMP with English coverage: Bankruptcies rock loan guarantors in China.
At the end of last year, there were more than 8,000 licensed loan guarantors, with most of them focusing on serving small enterprises. The companies had a combined registered capital of 880 billion yuan (HK$1.1 trillion), according to the China Banking Regulatory Commission.

Online consultancy Forward said financing demands from the small firms topped 16 trillion yuan in 2012. Indeed, thousands of illegal loan guarantors have been offering guarantee services for the underground banks in the past decade. In April, a bank run in Sheyang, Jiangsu province, was sparked by the collapse of illegal loan guarantors.

In Guangdong, the financial authorities said more than 30 loan guarantors had failed so far this year, while in Sichuan, the provincial government revoked 12 loan guarantee licences. The problems with loan guarantors would weigh further on a mainland leadership already buffeted by complaints about the way government treats small firms.

"Without the privately owned small businesses, China's economy won't have a future," said Song Weiping, the chairman of developer Greentown China. "They are the babies and they should be looked after carefully."
The SCMP article touches on the heart of the problem. The credit guarantee system is very large because small and medium businesses cannot obtain bank credit. This demand brings in many investors looking to earn high rates of return lending to small and medium businesses. Given the way the firms are set up and run, there would be a crisis when credit growth in the economy slowed, but many firms are thrown together by people with lots of cash to invest and little to no experience, to say nothing of those individuals using these companies as a way to defraud banks.

We have a very fresh example: the company at the center of the Qingdao port scandal, Dezheng. The story below is a result of Dezheng's fraud, but keep in mind that Wu Xiaoling has fingered credit guarantee companies as part of the cause of the crisis. Wu Xiaoling: Qingdao Port Scandal Fault of Banks Relying on Credit Guarantees.

A company in Nanjing, Nanjing Changhao International Trade, already had more than ¥200 million in debt, but it obtained bank credit using one of Dezheng's companies as a credit guarantee. Following the revelation of the Qingdao port scandal, Everbright went to court to freeze Nanjing Changhao's assets and the owner of the company, Liang Wei, is already believed to have fled jurisdiction. It's unclear whether the firm has done anything illegal other than to be associated with Dezheng at this point, as the firm had been paying back the loan and the company is still operating normally according to an employee contacted by a 21st Century reporter. Update: Boss hasn't fled, Changhao may be innocent victim.

Up to 10 firms are in similar situations due to obtaining credit guarantees from Dezheng. Most are in Qingdao, but there is also a Shanghai firm in the mix. The largest case: an Ordos wool company borrowed several billion yuan from four major banks thanks to credit guarantees from Dezheng. There could be more fraud involved in some of these cases, or these firms could all be innocent, but either way it's a mess.

Credit guarantees played a role in fraudulent borrowing. These borrowers then open their own credit guarantee firms and either aid others in fraudulent borrowing, or use the credit guarantee firm as a way to earn a high rate of interest on their fraudulently obtained money. Much of this credit may be tied up in the real estate market. Low income borrowers can borrow their down payment from a credit guarantee firm. Real estate speculators can obtain capital through credit guarantee firms. Legitimate companies in need of financing may also have borrowed, such as glass or furniture companies strapped for cash due to the slowdown in the real estate market. This is why the Chinese press sometimes refers to "stranded capital." Since real estate developers aren't paying their bills on time, their suppliers can't pay their bills, and this exposes credit guarantee companies to losses in the best of cases, and jail time in the worst of cases where fraud is involved.

At its most simple, this is the story of a credit bubble. Lenders all around the world chase high profit, high interest loans when the credit bubble inflates. Credit growth and a growing economy create a temporarily low risk environment where losses are limited. Poorly managed firms ignore or miscalculate the risk of the inevitable bust and when credit finally tightens, firms that didn't get out ahead of time find that only a few bad loans can wipe out years of profits.

In China, these credit guarantee firms are networked. A city or industry could have several or dozens of companies all with interlocking guarantees. Dozens more companies are involved because they obtained credit through one of the guarantee firms. Dozens more are involved because they made private loans at high rates of interest to the credit guarantee firms. Failure of one or two key firms in a city or industry can freeze credit overnight as creditors try to figure out who owes what to whom. This is a nightmare even if no fraud is involved. Toss in fraud and now credit is completely frozen by court order, company bosses suddenly disappear and yet more tertiary companies are involved because companies they transact with cannot move their funds.

Finally, the risk to the banks is not small. At the end of the day, credit guarantee companies are the thin veneer between Chinese banks and a mountain of potentially bad loans.

近十企业牵涉“德正系” 南京一贸易公司控制人“失联”
Qingdao "Germany is the line" Piandai case became public after previously had business cooperation with companies are shunned. Even so, some guarantees (or vice versa) as "Germany is the Department of" corporate loan financing business enterprises have about ten involved.

21st Century Business Herald reporter learned exclusively, Nanjing company called "Nanjing Chang Hao International Trading Co., Ltd." (hereinafter referred to as Chang Hao International) import and export trade enterprises, because the secured party financing is "De positive resources", so claims Bank of China Everbright Bank will be in early June this year took action to apply to the Nanjing Intermediate People 'litigation preservation "and demanded the seizure Chang Hao and Germany are the resources corresponding international debt assets.

Everbright Bank, Nanjing Branch in the application, said Germany is the resource as a guarantor for the actual debt Chang Hao international guarantees more than 200 million yuan, and has been unable to contact the actual control of the international Chang Hao Liang, Chang Hao same as the guarantor of international financing Liang is the bank believes it may have to leave.

Chang Hao international control or have to leave

Recently, the Nanjing Intermediate People's Court made a Everbright Bank, Nanjing Branch and the respondent Liang, Germany are resources, Chang Hao international financial loan contract dispute verdicts. Everbright Bank, Nanjing Branch May 24, 2013 signed with Chang Hao International a "comprehensive credit agreement" and "maximum mortgage contract," Everbright Bank loan 94 million yuan to Chang Hao International, Chang Hao International one of its property rights provide collateral. Germany is the actual control of resources and people Liang Chang Hao International provides the maximum amount of joint and several liability guarantee.

Depending on the business, Everbright Bank and Chang Hao International signed a national letter of credit facility under the credit agreement and the bank acceptance agreement. Chang Hao Company on February 21, 2013, apply for the issuance of 20 million yuan and 12 million yuan of bank acceptance bills each a maturity date of August 21, 2014.

Up to now, China Everbright Bank, said under the credit facility which has been settled. In addition, 52 million yuan of bank acceptance agreements involving bank acceptance bills stamped Everbright Bank has agreed to acceptance. Because Chang Hao International have been deposited in a bank deposit of 30%, so the actual Chang Hao international debt is 36.4 million yuan.

In June this year, "De positive resources" and its guarantor "NCN mining" the use of warehouse receipts pledge after repeated exposure Piandai case, Everbright Bank to the court for the preservation of 36.5 million yuan of assets.

21st Century Business Herald reporter Chang Hao international telephone call, an employee of the company, said, "Now the company's normal operation, no problem." As to whether the company Liang leave, the employee said, "(It is) very annoying thing, not a departure from the other thing is, certainly avoid trouble thing. "

However, the employee said, "no big problem at present know, the more stuff you contact directly with the total beam, I disclose." The employee said, the actual use of the funds is Chang Hao Fang instead of Germany is an international resource .

About ten companies involved in "De positive line"

In addition, according to the 21st Century Business Herald reporter learned that Qingdao aspect Import and Export Co., Ltd., Qingdao Hengtong Import and Export Co., Ltd. Qingdao Taida Mining Co., Ltd., Qingdao Yida Mines Ltd., Shanghai Yun Hui International Trading Co., Ltd. Qingdao Jay St. Albert Trading Limited, Inner Mongolia Erdos Cashmere Group, Qingdao Hengrun Zhiyuan Trading Co., Ltd., Zibo Lung Yun Ltd. and other companies involved but also because "Germany is the Department of" creditor banks were Piandai case to court.

Informed sources, involving the largest amount of Inner Mongolia Erdos Cashmere Group, the company is "Germany is the Department" in the Export-Import Bank, ICBC, Bank of China, CITIC Bank four bank guarantee billions of dollars in loans.

It is understood that Germany is Avalon's resources and its first aluminum in odd multiple loans on the Bank of China branch in Shandong Province and the aforementioned "Jay St. Albert" and "Taida Mining" relevant. St. Albert Jay amount which involved about 3.8 billion loan amount Taida Mining involves more than 350 million yuan. Business information, Jay St. Albert is a natural-owned enterprises invested 10 million yuan by the natural Li Xiaoxin established business areas: foreign investment of its own funds, goods and technology import and export, export business agent; wholesale metal products (excluding precious metals), steel and so on.

Taida Mining was established in February 8, 2010, the registered capital of 80 million yuan, the legal representative of Huang Bangxia, investors are Xinshengrong of Resources Investment Co., Ltd. Shandong, natural Li Feng, Wang Wenhong, Yuan Ni stake to 77.5% 5%, 5%, 12.5%. Operating businesses are mainly coal wholesale business; wholesale, retail non-ferrous metals, rubber products, daily necessities, hardware and so on.

No comments:

Post a Comment