Courtesy of Mish.
Bankruptcies Rock Loan Guarantors
In China, loan guarantors are going bust at a sharp pace. Many more bankruptcies are on the way. The setup is quite reminiscent of the implosion of credit insurers Ambac and MBIA during the US housing bust.
The South China Post reports Bankruptcies Rock Loan Guarantors.
Mainland loan guarantors have found themselves ensnared in the woes of the underground banking sector following a fresh wave of bankruptcies around the country.
Creaking under the weight of bad debts, hundreds of guarantee groups would be unable to bear even more, although their services are critical for the economic system and the millions of small firms that provide the majority of the mainland’s jobs.
“It is by all means a risky business,” said Wang Xiao, a Zhejiang entrepreneur who invests in a loan guarantee business. “An increasing number of loan defaults will soon force us to close down the business.”
In Wenzhou, nearly 90 per cent of loan guarantors have failed since the start of the credit crisis arising from the underground banking system, according to the media.
“It could become the last straw that breaks the camel’s back,” said Yan Yipan, the head of law firm Zhejiang Panyuan, which mainly deals with cases related to financing. “Without the loan guarantee services, it will be more difficult for small companies to do business.”
Rampant loan-shark schemes in Wenzhou resulted in the collapse of the city’s economy, with dozens of underground banking operators and investors either committing suicide or fleeing the country.
In Guangdong, the financial authorities said more than 30 loan guarantors had failed so far this year, while in Sichuan, the provincial government revoked 12 loan guarantee licences.
Anatomy of China’s Credit Bubble
I picked up the above reference from Macro Business Australia in its report on the Anatomy of China’s Credit Bubble.
The credit guarantee system is very large because small and medium businesses cannot obtain bank credit. This demand brings in many investors looking to earn high rates of return lending to small and medium businesses. Given the way the firms are set up and run, with many firms thrown together by people with lots of cash to invest and little to no experience, to say nothing of those individuals using these companies as a way to defraud banks, the potential for crisis when credit growth in the economy slows is obvious.
Today, we have a very fresh example: the company at the center of the Qingdao port scandal, Dezheng. The story below is a result of Dezheng’s fraud, but keep in mind that Wu Xiaoling has fingered credit guarantee companies as part of the cause of the crisis, Wu Xiaoling: Qingdao Port Scandal Fault of Banks Relying on Credit Guarantees.
…
