Hebei Financing Investment Guarantee Sees More Credit Guarantees Come Due

Hebei Financing Investment Guarantee is the busted state-owned credit guarantee firm that made headlines in the spring. I first covered it in April, Hebei Credit Collapse: State Owned Credit Guarantee on the Brink as AIG Business Model Falters, and then in August, More On Hebei Credit Guarantee Collapse; 3 "Invisible" Trusts Also Involved.

Since the northeast saw nominal GDP contract in the second quarter, it is not surprising to see more firms going bust. This causes credit guarantees to trigger, but HFIG is unable to pay.
"Securities Daily" reporters get the "Bohai Sea Trust - Hengshui Jingmei Chemical liquidity loans Capital Trust scheme project major issues interim information disclosure report" shows that Jingmei Chemical should pay interest on June 4, 2015 2.443 million yuan, Interest payable on June 17, 2015 1.08 million yuan, totaling 3.523 million yuan. However, after the Bohai Sea Trust and Jingmei Chemical communication, Jingmei Chemical is unable to pay the interest for the quarter. Guarantor Hebei Rong Investment Guarantee Group Limited due to their own operational problems, but also unable to compensatory interest in this.
The original company cannot pay the debt, the trust firm that loaned money can't pay investors, and the state-owned credit guarantee that made this all possible (by helping to make investors feel secure) can't pay on its guarantees.

Noteworthy: The Bohai trust product that failed was set up in June 2014. Jingmei Chemical borrowed the money in June and stopped paying interest in the second quarter. The story of China's credit implosion, if one is going to happen, is not in the banks, but in the credit guarantees. In many cases, these bad debts eventually end up on bank balance sheets, but it takes banks many Moons to recognize a bad debt.
“…the classification of NPLs has been problematic in China. The Basle Committee for Bank Supervision classifies a loan as “doubtful” or bad when any interest payment is overdue by 180 days or more (in the U.S. it is 90 days); whereas in China, this step has not typically been taken until the principal payment is delayed beyond the loan maturity date or an extended due date, and in many cases, until the borrower has declared bankruptcy and/or gone through liquidation.”
That's from this post by Christoper Balding, who goes on to write:
Special mention loans plus official NPLs in China are already at 5.13% and has risen 43% in the past year. Given what we know about Chinese loan classification, which Moody’s noted recently going even further noting that loan classification quality was actually deteriorating, it does not stretch credibility to believe that 5.5% is already in sight. The rapid rise of “special mention” loans, the classification before a loan becomes NPL, indicates that banks are trying to avoid reclassifying them which coupled with the rapid rise indicates significant unreported stress.

Second, a significant amount of lending is being conducted in increasingly shorter duration. For instance, Harbin Bank saw nearly two-thirds of its loans in short term holdings under one year and continuing to rise. The shift and continuing rise on short term lending would seem to indicate stress in repayment. All evidence points to mid-size and smaller banks along with shadow lenders having large portfolios of short duration assets under one year and the 4 majors having about 1/3 short term lending with longer term lending flowing heavily to SOE’s and similar type firms. This means that every year large amounts of debt needs to be rolled over or paid off. With these numbers continuing to rise as portion of total debt this seems to indicate unreported stress in the credit market. Couple this with what we known about debt classification and it paints a worrying picture.

While I think the RBS analysis is solid, I don’t believe it is starting from the right base. If we believe that a not insignificant portion of special mention loans will migrate into NPLs, which is not an unreasonable assumption given a slowing economy then adding in a belief about loan classification with Chinese characteristics and we can already see 5.5% on the horizon.
If you stand upon the mountain of credit guarantees, you can see much farther.

Sina: 河北融投担保项目现利息违约 渤海信托一项目拟转让收益权

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