Mutual loan guarantee plagues China’s solar sector16 August, 2012, 14:45. Posted by Zarathustra
Earlier, LDK Solar, the biggest private enterprise based in Jiangxi, is on the verge of going bust (funny enough, we just found out that a year or so ago, Moody’s gave LDK Solar 9 red flags).
The solar industry in China is highly leveraged and profitability is low according to various different accounts (e.g. Yicai). According to New York Times/Reuters, solar panel prices are falling, and the prices can more barely cover the costs of production. Profitability is poor, and many players in the sector are currently under pressure.
The solar sector also demonstrates some of the practices that many other companies in China seem to share, and that is potentially going to make matter worse – the credit guarantee.
We have recently discussed a few interesting cases related to the practices of obtaining loans from banks with a third party guarantees. One Beijing-based credit guarantee company, for instance, has gone bust. Meanwhile, many more companies have been guaranteeing loans for each other, and that practice has dragged some 600 or more companies into a mini credit crunch in Zhejiang of China. This practice is also popular in among steel, energy and in other sectors, including solar sector.
|By ChristofferRiemer (Own work) [CC-BY-3.0], via Wikimedia Commons|
Li Fei, the CEO of Chengxing Solar Company, committed suicide after it becomes apparent that his company will not be able to service the loans that it guaranteed for another company. Like quite a few other businessmen who are running away/hiding/killing themselves, his company was highly leverage and was under pressure. One of the sources of trouble, as it turns out, was that it has guaranteed some tens of millions yuan of loans for yet another solar company owned by a Wenzhou businessman called Hu Fulin, who, if some of you remember, ran away from creditors last year (he subsequently returned, but we have no idea what he is up to now, nor are we interested in his whereabouts).
So when Hu Fulin’s own solar company was in trouble and required a restructuring, Chengxing is dragged into the hole as it guaranteed some of the loans of Hu Fulin’s solar company. According to First Financial Daily, Chengxing probably has less than RMB100 million of orders, and profit margin is estimated to by 10%, yet it has RMB20 million of liabilities associated with credit guarantees. The CEO then jumped off a building and die.
On top of the problem of mutual guarantees, which have dragged numerous otherwise “healthy” companies into sudden liquidity trouble, solar companies are also facing tremendous liquidity pressure now as their customers are increasingly delaying payments for their purchases.
The credit guarantees system has been an important part for many Chinese companies, especially for the small- and medium-sized businesses. As more and more cases of credit guarantees causing troubles, we believe these are not isolated cases. Rather, we suspect that it reflects a potentially serious systemic problem.