The slow death of mutual guarantee is tightening credit in China13 August, 2012, 18:23. Posted by Zarathustra
Earlier, we mentioned that many companies in China cannot obtain credits from banks unless they can obtain a third-party guarantee, and one popular practice of obtaining guarantees turns out to be having a group of companies guaranteeing loans for each other.
This practice of mutual guarantee has caused some trouble as one of the companies in the chain went bust, and banks became worried about their loans to other companies which were guaranteed by the bankrupted one, banks started calling loans, which in turn caused more troubles with more companies. In the end, more than 600 companies were affected by the credit crunch.
The practice of guaranteeing loans for each other is popular in many sectors, including metal and mining, energy, construction materials, auto sales, etc. As many of these sectors are suffering from slowing demand amid slowing economy, the credit risks are perceived to be greater now (especially after the event mentioned above). Steel traders, for instance, are facing difficult economic environment with falling steel prices, these mutual guarantees appear to be causing some troubles.
Banks are tightening credit to steel traders, particularly the smaller ones, and some companies are trying to get out of their chain of mutual guarantees before they get burnt by other failing company.
Slowing economy and over-capacity across the economy means the companies should have little appetite to take out loans and invest and expand their businesses. Now, on top of that, it appears that banks are not easing credits to where they are needed.