SHANGHAI (Reuters) — 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.
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.
(Additional reporting by Koh Gui Qing and Shanghai Newsroom;
editing
by John Mair)
