Caixin
Jun 26, 2012 06:59 PM

Domino Risk Grips Zhejiang Bankers, Borrowers

(Wenzhou) – The Zhejiang government is scrambling to settle a credit crisis threatening banks and financial institutions that altogether issued about 6 billion yuan in loans to scores of companies.

Sources say 62 companies, from furniture makers to import-export traders, have been affected to varying extents by the collapse late last year of Hangzhou-based property developer Tianyu Construction Co. Ltd.

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The companies were financially linked to Tianyu through a province-wide, reciprocal loan-guarantee network. Tianyu's sudden failure raised the specter of a domino effect of defaults taking down every network participant and devastating their lenders.

"After Tianyu went bankrupt, banks in Hangzhou started calling in loans to other firms guaranteed by Tianyu," said the owner of a company tied to the network. "That had a ripple effect and affected a number of other companies."

Zhejiang leaders convened a meeting on June 20 to discuss the crisis with bankers and company executives. Details were not released, but the province might take a cue from the capital city Hangzhou, where officials recently worked out a plan for rescuing banks and companies.

The Hangzhou bailout plan was publicized following a May meeting between city officials and executives at companies, banks and financial institutions tied to the guarantee network.

Under the plan, the Hangzhou government said it will finance bridge loans to struggling companies, which in turn can use that money to repay banks as long as they maintain operations. In addition, city officials ordered local banks to continue lending to viable firms.

The government's program, however, did not stop Zhejiang bankers who've been busy tracking down companies linked to Tianyu and calling their loans.

Rescues and Risks

Guaranteeing loans for each other has long been common in Zhejiang, said a risk officer at a major bank. Neither is there anything unusual about credit crises and subsequent government bailouts in the province.

The city of Shaoxing, for example, rode to the rescue in 2008 following the failure of a local petrochemical firm called Zhejiang Hualian Sunshine Petro-Chemical Co. Ltd.

Hualian Sunshine borrowed more than 8 billion yuan from eight banks and let a number of enterprises use that borrowed money to guarantee their own loans. Together, the network's participants borrowed more than 100 billion yuan, said an Industrial and Commercial Bank of China official.

The Shaoxing government intervened to arrange a restructuring of Hualian Sunshine's debt, assuming half the burden through a state-owned enterprise. Companies in the lending network also received government support.

Similarly happy endings have yet to be worked out in Zhejiang's latest credit crunch.

Banks that extended credit to the Hangzhou-based electrical equipment maker Hupai Holding Group, for example, have been calling outstanding loans for months, pushing the company toward bankruptcy.

Loans worth 382 million yuan written by China Zheshang Bank helped Hupai buy Zhejiang Hongfa Energy Investment Co. in November 2010, a source said. But the bank demanded a repayment of 132 million yuan in April, arguing the borrower failed to provide adequate collateral.

Hupai's other bankers started calling loans after Hongfa defaulted in May on a 40 million yuan loan issued by Zheshang Bank.

Who's to Blame?

Some officials close to the latest crisis have faulted banks for loose credit policies that fueled the Tianyu network's development.

One credit analyst said Zhejiang banks have been blindly trusting loan guarantors while failing to properly examine and screen loan candidates. An official at China Construction Bank's Zhejiang branch said his bank should have better analyzed potential borrowers' financial conditions, not just guarantees and promises.

Some company managers have criticized the banks as well, saying they acted greedily during periods of easy credit access but pulled back at the first sign of trouble.

Meanwhile, some bankers have pointed an accusatory finger at the province's company executives.

"Zhejiang's business owners were spoiled by easy access to credit, especially in 2008 and 2009," said a credit manager at one bank. "Back then, they could always get loans using land as collateral and could always make money by investing in property."

The reciprocal nature of the guarantee network stripped real bank loan guarantees of any value, argued another banker. The system has made all its participants mutually vulnerable to an economic downturn, he said.

Now that property development can no longer guarantee profits, the banker said, borrowers and guarantors are in trouble together.

Cash flow at some enterprises has fallen to dangerously low levels, said a bank loan officer, so that they've been forced to survive on credit. Many ran out of cash after pouring money into speculative property investments, he said, which flopped after the central government imposed real estate development restrictions in 2010.

An executive at Hangzhou furniture manufacturer Rongshi Group is among those faulting the banks, which have called in his company's loans.

"Most banks care only about how to get themselves out of the mire," he said. And without a broad solution for companies and banks "no one will escape."

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