China's Debt Guarantee Tangle

Discussion in 'Economics' started by Stockolio, Feb 19, 2019.

  1. The Domino Effect:

    In China, it is not just local government units vouching for corporations debt. The companies themselves are backstopping each other’s obligations in order to get bank loans, a phenomenon less familiar in global markets. Hordes of China’s private firms are now going under after guaranteeing other’s loans.

    Cracks are starting to show in such guarantees. Tianchang City Construction Investment Development Co., a funding unit in the central province of Anhui, guaranteed a trust loan taken out by a private firm, which missed payment on the borrowing in June. The LGFV said in a bond document dated 2016 that it has guaranteed a "large amount" of debt, which has an impact on its own financial health.

    How bad is the cross-guarantee problem? Probably worse than you would imagine. Shandong Dahai Group has guaranteed debt for 14 companies adding up to 2.67 billion yuan ($394 million) or nearly half of its total assets. Of the 14, 6 have already run into financial or legal trouble while two have been blacklisted by the courts as ‘dishonest debtors’ due to their abysmal creditworthiness.