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FINANCE

Banking Regulator Cracks Down on Corporate Loan Guarantors

By Han Yi and Dong Tongjian

(Shanghai) — China’s banking regulator has begun reining in corporate loans backed by multiple guarantors, in a bid to curb the spread of financial risk posed by chains of companies offering their own credit to support less creditworthy peers.

The China Banking Regulatory Commission (CBRC) sent a notice this month to its local branches urging them to identify risks associated with cross-guarantees, an arrangement between two or more companies supporting each other to obtain bank loans by acting as mutual guarantors, according to local banking regulators who have seen the notice.

The CBRC said local banking regulators should investigate ties between borrowers and their guarantors, the flow of money, and check the authenticity of collateral behind each loan.

It asked local authorities to pay more attention to companies in the steel, coal and aluminum industries, which are being squeezed by low commodity prices. It also urged banks to stop heavily relying on collateral as a way to control their lending risk, and place more emphasis on determining which borrowers were most likely to meet their financial obligations.

The practice of cross-guarantees has been lauded by government authorities from both the banking and other sectors as a way for smaller companies with financing difficulties to meet their needs. But in recent months, the practice has created a growing debt crunch that local regulators say was caused by long chains of guarantors, threatening good businesses who were being forced to honor financial obligations of shakier ones.

In January, Shandong Tianxin Group, a diversified company whose businesses include textiles, photovoltaics, copper processing and real estate, entered into the bankruptcy and reorganization process, according to a judge in a court in eastern China’s Shandong province. A court statement released in February revealed the company owed 3.4 billion yuan ($440 million) by the end of August 2016, equal to 104.4% of its total assets. Six of its related companies were also dragged into the bankruptcy process due to cross-guarantees.

China Huishan Dairy Holdings Co. Ltd. also came under the spotlight last month when its Hong Kong-listed shares plunged 85% in a single day. Bankers told Caixin that Huishan currently owes about 12 billion yuan to 13 billion yuan to as many as 70 financial institutions, including 23 banks.

Hongling Capital, one of Huishan’s creditors, said the dairy had a credit line of 14 billion yuan from banks at the end of September 2016, and that 10.4 billion yuan of that was guaranteed by other companies.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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