Hebei Credit Guarantee Contagion; "Good Businesses Don't Need A Guarantee"

Already, 30 projects are already overdue and Hebei Financing Investment Guarantee Group cannot pay. The total amount comes to 5 billion yuan. At the end of 2014, HFIG had guaranteed 33.9 billion (1172 total guarantees), but only 680 million in compensation was set aside, in addition to the firm holding only 98 million in reserves.In the first quarter of 2015, it had paid out 130 million on 15 guarantees. It was left with 32 billion in credit guarantees (1152 total guarantees), it had 480 million set aside for compensation and 2.3 billion in reserves at the end of May.

No one involved wants to talk, despite many firms making a public call for a bailout last month.

　However, most agencies after being contact by the paper, without exception, chose silence.

The impact on Hebei's economy is real, but subtle. Many financing companies no longer want to deal with Hebei companies and stopped making loans to firms in the wake of the HFIG crisis. Private equity firms are caught in this swamp too, laying off workers as the risk increases.

"Bad lot, if sufficient collateral value, only a liquidity problem, will get better in time, but some of the projects are very weak and have weak cash flow, such as manufacturing, etc., if auditing and lending controls were not strict, it will be very troublesome."

Business are going bust in Hebei with the province in recession:

According to reports, a number of private enterprises in Hebei Province have gone bankrupt this year unable to repay bank debt, the Hebei provincial government repeatedly came forward, requiring financial institutions ease financing for HFIG, actively support the financing of investment projects.

...HFIG has proposed, through mergers and acquisitions, debt restructuring and other means, digestion and revitalize the stock of assets; financial asset management companies by provincial soon to be established, the provincial re-guarantee companies and other platforms to help solve business problems in Bulgaria and disposal disposal of bad debts and non-performing assets; and support competitive enterprises through a new three-panel market, equity market, bond market and other multi-level capital market financing, improve the quality of development.

Meanwhile the financial situation is deteriorating as the credit crisis goes viral:

But things are far more than that, the impact of the financial investment of events has spread to the securities industry.

When the country's second largest credit guarantee company suffers a major crisis, people begin to doubt the ability of guarantee companies to fulfill their responsibilities, along with the economic slowdown, these concerns become greater.

Good businesses don't need credit guarantees has practically become the industry consensus.

Credit guarantee firms were in the business of providing trust says Lu Feng (pseudonym), who went from the credit guarantee business to the trust business. Most banks and lenders didn't know the credit situation of these companies and wouldn't make direct loans without a guarantee, but if the guarantee firm can't back the guarantee, there is great risk.

The credit guarantee firms earned a small profit, but carried all the default risk, while the lender pocketed high interest rate income.

Most of the public credit guarantee companies are cautious, guaranteeing SMEs with a track record in important industries, while private businesses aim to maximize profits in short term or very high interest rate deals, while watching out for risk. Credit guarantee firms can earn about 2% to 3% of loan amounts, but their bad loan rates are usually about 2%, so they don't make much money.

HFIG acted more like a private firm, with poor management and risk control, sometimes in industries that struggle to earn a profit.

No surprise at the result.

Sina: 河北融投违约波及担保业 受牵连金融机构选择沉默