• Tue
  • Dec 23, 2014
  • Updated: 5:37am
BusinessChina Business

Bankruptcies rock loan guarantors in China

The credit crisis in the mainland underground banking sectoris hitting lending service groups as bad debts grow and insolvencies escalate

PUBLISHED : Monday, 07 July, 2014, 5:26am
UPDATED : Monday, 07 July, 2014, 6:42am

Mainland loan guarantors have found themselves ensnared in the woes of the underground banking sector following a fresh wave of bankruptcies around the country.

Creaking under the weight of bad debts, hundreds of guarantee groups would be unable to bear even more, although their services are critical for the economic system and the millions of small firms that provide the majority of the mainland's jobs.

"It is by all means a risky business," said Wang Xiao, a Zhejiang entrepreneur who invests in a loan guarantee business. "An increasing number of loan defaults will soon force us to close down the business."

In Wenzhou, nearly 90 per cent of loan guarantors have failed since the start of the credit crisis arising from the underground banking system, according to the media.

The city, dubbed the capital of China's private businesses, had pinned hopes on the companies offering capital guarantee services to bail out troubled small companies when Beijing allowed it to legalise the underground banks.

"It could become the last straw that breaks the camel's back," said Yan Yipan, the head of law firm Zhejiang Panyuan, which mainly deals with cases related to financing. "Without the loan guarantee services, it will be more difficult for small companies to do business."

Rampant loan-shark schemes in Wenzhou resulted in the collapse of the city's economy, with dozens of underground banking operators and investors either committing suicide or fleeing the country.

The government felt loan guarantors could bridge the gap between cash-hungry businesses and financial institutions. Borrowers without enough collateral could use loan guarantee services to access much-needed funds. The guarantors normally charge 3 per cent of the loan amount as fees.

"Three per cent fee looks good, but a loan default would be equivalent to the total profits made from dozens of deals," Wang said.

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."


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The article is talking about China's domestic debts.
What's also worrying, or more worrying, is the country's foreign debts.
It's said that the Chinese enterprises (CEs) have been falling into the trap of US$ debts.
Inside the country, loan is expensive and is not easily available.
So, at relatively very low interest rates, the US$ debts look very attractive to the CEs, which are now also encouraged by the Chinese authority to borrow from the foreigners.
The borrowed US dollar, when converted into yuan, will increase the pressure for the yuan to further revaluate --- this is good from the foreigners' point of view, before they move their capital massively out of China.
Later, for some reasons, say when the US dollar appreciates after the rise in US interest rates, the foreign capital may flow massively out of China.
The yuan will have to devaluate --- if not, to maintain the fixed yuan/US$ exchange rate, China's foreign reserves will be greatly depleted, which will adversely affect people's confidence in the country and the coming smooth operation of the Asian Infrastructure Investment Bank.
After the yuan's massive devaluation, the foreign debts of the CEs in US dollar will greatly prop up, leading to many cases of potential insolvencies and defaults --- a similar situation faced by those Asian firms during the 1997 Asian financial crisis.
Either the CEs are saved by the Chinese authority, in which case the country's US$ reserves will be further depleted, or they may have to surrender their shares to the foreigners as one form of loan repayment.
Failure to do so may give an excuse for the foreign countries to harass China militarily.
Note that not all the US$4 trillion foreign reserves belongs to China, only about 30-40% of it really belongs to the country.
US$4 trillion is just the total volume of transaction in the world's foreign exchange market in a single day.
At the end of the day, even powerful domestic firms like Alibaba and Tencent may be partly or mostly controlled by the foreigners, who gain first from yuan revaluation before the capital flight, and from yuan devaluation after the capital flight.
This is especially so if China fully opens up her capital account too early.
The fruits of China’s reforms will then be mainly reaped by the foreigners, not by the Chinese people.
And all these without mentioning all the available derivative instruments which can be used by the foreigners to short and gain from China when the yuan crumbles.
That’s the horror of Currency War !
(Chinese readers: ****blog.sina.com.cn/s/blog_59b377290102uwft.html)
Some US hedge funds participated in shorting Japan during her property boom in the early 1990s, and she tragically lost the currency war to the US.
Does China want to repeat the Japanese story ?
In Germany, about 2000 banks in their sophisticated banking system are serving their country's SMEs, and regard the latter as their main clients.
China has a lot to learn from this country, because manufacturing industries are very important in both countries.
Our ancestors in the Qing Dynasty started learning from Germany more than a century ago, perhaps we have to do the same nowadays.
It can be said that China can learn more from the German model than from the American one.
(Chinese readers: ****yetanyetan.blog.sohu.com/304163728.html)
Hopefully, China's latest targeted expansionary monetary policies can lower the average cost of capital in the real economy and help to suppress the 'fresh wave of bankruptcies around the country.'
Well, not even more new blood being transmitted to the sick person can really improve her overall health.
The new blood is the new money created by the PBOC's targeted expansionary monetary policies.
The sick person is 'China's real economy minus the black hole (BH) of China's local government financing platforms, SOEs, and the property market.'
I hope you know what MV=PQ means in economics.
Initially, M1V= p1q1(non-BH) + p2q2(BH).
After the blood transfusion, M2V = p1q1(non-BH) + p3q3(BH),
where (M2-M1) is the amount of new blood transmitted, which is finally all absorbed by the tumor part of the body (BH): p3q3 > p2q2.
Thanks to the scalpers, interest arbitrage or carry trade (borrow low, lend high) dictates that all the new money simply spiral back into the black hole at the end of the operation.
Targeted monetary policy, an oxymoron, and an idea even borrowed by the ECB, can't replace the role of fiscal and industrial policies in facilitating the economy's structural improvement, and the need of practising real reforms.
(Chinese readers: ****blog.sina.com.cn/s/blog_470dbd1d0102uwrp.html?tj=fina)
Time will tell.
Currency War is the most convenient and least costly tool that can be used by the foreigners to subdue China.
The war, if any, will happily be joined by the powerful western newspapers which will join together to short China in unison.
Sometimes, money management is more an art than a science.
One must be very careful when doing so.
Now the Chinese authority should require the CEs to stop borrowing from the foreigners at once, and repay their old foreign loans as quickly as possible --- no rollover of debts should be encouraged.
And China should also slow down her pace of internationalising the yuan and opening up the capital account.
Even a personal computer needs a firewall, not to mention a big developing country.
Time and again, even victors are by victories undone.
We can let our children do some of our jobs.

The most pressing question to answer right now in Hong Kong should be the following:
‘In the future, who’s boss in Hong Kong ?’
Remember that the CEs have borrowed quite a lot of money from Hong Kong.
What if most of them cannot repay their loans later ?
It seems that we can try to answer the above question at present.
And the answer is two-folded.
Politically, it should be China.
Economically, it may well be Hong Kong !
‘The Fuggers took over many of the Medicis' assets and their political power and influence.’
‘Philip II of Spain defaulted on debt four times - in 1557, 1560, 1575 and 1596 - becoming the first nation in history to declare sovereign default ...
This sovereign default threw the German banking houses into chaos and ended the reign of the Fuggers as Spanish financiers.’
(From Wikipedia)
When they are shorting China, perhaps the foreigners will short Hong Kong at the same time as well.
It's hoped our foreign reserves will also be enough this time to maintain the linked exchange rate mechanism, as before.
Indeed the HK$-US$ fixed exchange rate is ultimately backed up by the confidence of the Hong Kong people in our own currency.


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