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Finance & Economy

In wealthy Chinese city, debt guarantees spark default contagion


Workers look at a ladle pouring molten iron into a container at a steel plant in Hangzhou, Zhejiang province

Workers look at a ladle pouring molten iron into a container at a steel plant in Hangzhou, Zhejiang province

A network of loan guarantees set up to improve companies’ access to credit in one of China’s richest districts is creating new risks of default as some debts sour, another sign of how private firms are bearing the brunt of an economic slowdown.

Chinese media have reported on a credit crunch developing among steel and textile manufacturers in Hangzhou city, 175 km (110 miles) south of Shanghai in Zhejiang province, as the failure of some to repay loans pushes their burden onto healthier firms.

Hangzhou is part of the Yangtze River Delta (YRD), an engine of growth during China’s boom years but now the source of a third of non-performing loans in the country.

The government ranks the city’s Xiaoshan district as China’s seventh wealthiest. One of the main drivers of its prosperity — small, private firms — is now a handicap.

“The textile industry is not a big borrower in the banking sector. The problems that we see arise when mutual guarantees go bad and textile firms are dragged in,” said Robert Yang, assistant to the president at the China National Textile & Apparel Council.

Concern about the huge growth in Chinese corporate debt since the global financial crisis has intensified this year as the government allows market forces to play a bigger role in deciding winners and losers.

Private firms often struggle to obtain credit from state-owned banks, which prefer to lend to state-owned firms due to their government backing.

That trend has worsened as economic growth slows, credit conditions tighten, and authorities work to reduce excessive investment and overcapacity in some sectors.

Steel and textile manufacturers in Xiaoshan, like other private firms around the YRD, sought to overcome such obstacles by providing loan guarantees for each other to gain bank credit.

Now defaults by a few companies threaten a chain reaction that could ensnare even profitable firms, as the guarantees have left them on the hook for debts of their bankrupt competitors.

“Currently, Zhejiang’s economic structural adjustment and (industrial) upgrading is at a critical stage. The risk from guarantee chains is still rather large,” the Zhejiang branch of the China Banking Regulatory Commission warned in February.

MUTUAL GUARANTEES

Unlisted polyester yarn producer Hangzhou Jianjie Chemical Fiber Co Ltd was recently liquidated following the default of another textile firm whose debts Jianjie had guaranteed, China Business News, a national newspaper, reported.

Jianjie’s collapse in turn affected five other textile firms. In all, 3 billion yuan ($480 million) in bank loans to the six firms are at risk, the paper said.

“After (Jianjie Chemical Fiber) went bankrupt and was liquidated, companies with mutual guarantees had to take on more debt,” the paper quoted Zhu Rujiang, director of the Xiaoshan District Funding Chain Risk Prevention and Mitigation Leadership Group, as saying.

“They can still handle this debt, and they will have no trouble surviving, but a key requirement is that banks can’t withdraw their loans,” he said, according to the paper.

Zhu’s group was set up to mediate between banks and companies, according to the district government’s website. Zhu declined to comment when Reuters reached him by phone.

China Business News also reported that Hangzhou Zhongxin Steel Structure Manufacture Co Ltd, which makes scaffolding, had shut down and could place another 1.2 billion yuan in bank loans to four other companies at risk.

Zhongxin, whose website is no longer accessible, couldn’t be reached for comment.

“The crisis of mutual guarantees is very serious and there is no good solution for this problem,” said Zhou Dewen, vice chairman of the China Association of Small and Medium Enterprises in Wenzhou, another prosperous city in Zhejiang.

Source: Reuters “In wealthy Chinese city, debt guarantees spark default contagion
 
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About chankaiyee2

Author of the book "Tiananmen's Tremendous Achievements" about how with the help of Tiananmen Protests, talented scholars with moral integrity seized power in the Party and state and brought prosperity to China. The second edition of the book will be published within a few days to mark the 25th anniversary of Tiananmen Protests All the parts in the first edition remain in the second edition with a few changes due to information available later and better understanding. There are also some changes for improvements of style. The new parts are Chapters 12-19 on events in China after the first edition was published: The fierce power struggle for succession between reformists and conservatives; Xi Jinping winning all elders’ support during his mysterious disappearance for 2 weeks in early September, 2012; and Xi Jinping Cyclone. Chan Kai Yee's new book: SPACE ERA STRATEGY: The Way China Beats The US An eye-opening book that tells the truth how the US is losing to China. The US is losing as it adopts the outdated strategy of Air-Sea Battle while China adopts the space era strategy to pursue integrated space and air capabilities: It is losing due to its diplomacy that has given rise to Russian-Chinese alliance. US outdated strategy has enabled China to catch up and surpass the US in key weapons: Hypersonic weapons (HGV) that Pentagon regards as the weapon that will dominate the world in the future. Aerospaceplane in China’s development of space-air bomber that can engage enemy anywhere in the world within an hour and destroy an entire aircraft carrier battle group within minutes. Anti-satellite (ASAT) weapons, anti-ASAT weapons, stealth aircrafts, drones, AEW&C, etc. The book gives detailed descriptions of China’s weapon development based on information mainly from Chinese sources that the author monitors closely. U.S. Must Not Be Beaten by China! China is not a democracy. Its political system cannot prevent the emergence of a despotic leader or stop such a leader when he begins to bring disasters to people. A few decades ago, Mao Zedong, the worst tyrant in world history did emerge and bring disasters to Chinese people. He wanted to fight a nuclear war to replace capitalism with communism but could not bring nuclear holocaust to world people as China was too weak and poor at that time. If a despot like Mao Zedong emerges when China has surpassed the US in military strength, world people will suffer the misery experienced by Chinese people in Mao era. China surpassing the US in GDP is not something to worry about as China has the heavy burden to satisfy its huge population, but China surpassing the US in military strength will be world people’s greatest concern if China remains an autocracy. US people are of much better quality than Chinese people. What they lack is a wise leader to adopt the correct strategy and diplomacy and the creative ways to use its resources in developing its military capabilities. I hope that with the emergence of a great leader, the US can put an end to its decline and remain number one in the world. China, US, space era strategy, air-sea battle, space-air bomber, arms race, weapon development, chan kai yee

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