A Beijing-based credit guarantee company is going bust14 August, 2012, 23:50. Posted by Zarathustra
Back in May, Patrick Chovanec of Tsinghua University of Beijing highlighted the risks of credit guarantee companies. Similar to the mutual and collective guarantees we mentioned recently (e.g. that 600 companies that were dragged down, or some steel companies that were dragged down), some companies could only obtain bank loans in another company was willing to provide guarantee, and these companies ended up guaranteeing loans for each other.
The difference is that for credit guarantee companies, a borrower would pay a fee to one of the credit guarantee companies. In exchange, the credit guarantee company would provide guarantee. Should the borrower default on its debt, the credit guarantee would be cover the losses for banks. From the bank’s perspective, it is not unlike buying a credit default swap on its borrower from a credit guarantee company. As as Patrick Chovanec pointed out, these things are not unlike AIG.
One of these companies, as Prof. Chovanec highlighted back in May is called Zhongdan Investment & Credit Co. Ltd, which is based in Beijing. According a Caixin report in April, this company not only provide credit guarantee services, it also sold wealth management products (WMPs) and asked their customers to use some of the money they got from bank loans to purchase these WMPs, and the money being raised from WMPs will in turn be invested in other parts of the shadow banking system, such as pawnshops. And then, banks became aware of this somewhat fishy scheme, and start calling loans from those companies which were guaranteed by Zhongdan.
Then, today, Caixin reports that Zhongdan will need to prepare a restructuring plan by 20 August, or the city government will revoke its operating license, and the company will go bankrupt:
Zhongdan Investment Credit Guarantee Co. Ltd., established in 2003, has been caught in a liquidity crisis since January, when its capital chains reportedly started falling apart. This prompted banks and clients allegedly tricked into depositing their borrowed money with the firm to demand immediate repayment.
Investigations led by Beijing’s municipal finance work bureau found that the firm has guaranteed more than 3 billion yuan in outstanding loans. This involved 22 banks and 294 enterprises in Beijing.
Some of these companies had borrowed from banks with Zhongdan’s guarantee and invested the money not in their businesses but in the latter’s so-called wealth management schemes, which promised high returns through murky operations.
This is fascinating as well as somewhat disturbing. With RMB3 billion of outstanding loans being guaranteed, banks will probably try to call back loans, if they have not already started doing so (and of course they have), and these 294 companies being guaranteed would have been under pressure. Not to mention that some of companies might have bought in some of the WMPs issued by Zhongdan which may or may not be able to be repaid.
Certainly, this is a case for one credit guarantee company which has behaved very badly and got itself into trouble. But it is more likely that this is a tip of an iceberg, as Prof. Chovanec pointed out, and the slowing economy could have a systemic impact on many of the borrowers, which in turn increase pressure on credit guarantee companies.
So now we are seeing one more hidden risk among many within the financial system.