China’s hidden debt stirs investor angst as defaults rise
aISINNZOEbAULTSZinZShinaZareZunearthingZhiddenZdebtZatZcompaniesZacrossZtheZ countryA
SmallZfiZrmsZthatZcanktZgetZloansZbyZ themselvesZhaveZbeenZwinningZbanksZ overZbyZgettingZotherZcompaniesZtoZ guaranteeZtheirZborrowingsAZTheZcompaniesZmakingZthoseZpledgesZexcludeZthemZ fromZtheirZbalanceZsheets,ZleavingZcreditorsZinZtheZdarkAZBorrowersZoftenZextendZ theZguaranteesZforZeachZother,ZraisingZ theZriskZthatZfailuresZcouldZricochet,ZatZaZ timeZwhenZincreasingZborrowingZcostsZ haveZalreadyZaddedZtoZstrainsA
ShinaksZbankingZregulatorZhasZorderedZchecksZofZsuchZcrossloans,ZSaixinZreportedZbridayAZScrutinyZ isZmountingZafterZaZcornZoilZproducerZinZ theZeasternZprovinceZofZShandongZsaidZ lastZmonthZitZhadZguaranteedZdebtZofZaZ neighboringZaluminumZproductZmanufacturerZwhichZisZnowZstuckZinZaZcashZ crunchAZJustZdaysZbeforeZthat,ZaZlocalZ governmentZfiZnancingZvehicleZcLNbD)ZinZ ShinaksZsouthwestZhadZtoZrepayZanZautoZ partsZmakerksZloansZitZhadZguaranteedZ afterZtheZlatterZdefaultedA
“OisclosureZofZsuchZguaranteesZ isnktZtimely,”ZsaidZQiuZXinhong,ZaZ Shenzhen-basedZmoneyZmanagerZatZ birstZStateZSindaZbundZManagementZ SoAZ“Sometimes,ZitksZlikeZaZburiedZmineZ andZyouZdonktZknowZwhenZtheZrisksZwillZ explodeA”
ThisZdebtZminefiZeldZcouldZbeZbigAZTheZ amountZofZloanZguaranteesZatZprivatelyZ heldZfiZrmsZinZShinaZisZequivalentZtoZHHiZ ofZtheirZequity,ZandZatZLNbDsZisZH8i,Z accordingZtoZSiticZSecuritiesZSoAZTheZloadZ isZevenZheavierZatZweakerZborrowersAZ AboutZxxiZofZissuersZratedZlowerZthanZ AA-ZhaveZaZratioZofZmoreZthanZwIi,Z accordingZtoZEverbrightZSecuritiesZSoAZ TheZphenomenonZisZlessZcommonZinZtheZ USZbecauseZbanksZdonktZrequireZsuchZ guaranteesZtoZoffZerZloans,ZaccordingZ bitchZaatingsA
‘BUTTERFLY EFFECT’
“IfZcompaniesZinZtheZsameZregionZoffZerZ aZhugeZamountZofZguaranteesZforZeachZ otherksZdebt,ZitZwouldZformZaZguaranteeZwebZandZdeepenZinterconnectionsZ amongZtheZcompanies,”ZsaidZNangZ Meng,ZdirectorZofZratingZatZNoldenZSreditZ aatingZInternationalZSoAZinZBeijingAZ“IfZ oneZcompanyZhasZtoZrepayZdebtZforZitsZ guaranteedZcompany,ZrisksZwouldZquicklyZrippleZtoZotherZcompaniesZinZtheZweb, whichZwillZresultZinZaZbutterflZyZeffZectA”
InvestorsZdumpedZcorporateZbondsZ issuedZbyZborrowersZinZZoupingZSountyZ inZShandongZafterZtheZcornZoilZproducer,Z XiwangZNroup,ZsaidZonZMarchZJ9ZthatZitZ hasZJA9ZbillionZyuanZchxJHAJZmillion)ZofZ outstandingZguarantees,ZtheZequivalentZ ofZH7iZofZequity,ZforZdebtsZofZQixingZ NroupZSoA
TwoZcallsZtoZXiwangksZgeneralZoffiZZceZ wereZnotZansweredA
NuarantorsZdonktZmarkZtheZpledgesZ onZtheirZbalanceZsheetsZandZoftenZ disclose Z them Z only Z on Z an Z annual Z basis AZ Such Z shadow Z debts Z pose Z rising Z risks Z after Z central Z bank Z tightening Z pushed Z up Z on shore Z corporate Z bond Z yields Z to Z two yearZ highs Z and Z defaults Z on Z local Z notes Z surged Z to Z aZ record A
As Z Shin aZ opens Z up Z the Z world ks Z third-biggest Z bond Z market, Z the Z hidden Z debt Z also Z presents Z aZ challenge Z for Z international Z investors Z grappling Z with Z what Z bond Z legend Z Bill ZN ross Z dub bed Z the Z“mystery Z meat Z of Z emerging-market Z countries A” Z Moody ks Z Investors Z Service Z received Z more Z inquiries Z from Z global Z investors Z about Z such Z guarantees Z following Z the Zinc id entZinZZou ping, Ivan ZS hung, Z head Z of ZN re at er Z Shin aZ credit Z researchA
“TheZcrossZdebtZguaranteesZdefiZnitelyZ raise Z concerns ,” Zs ai dZ IvyZThung,Zh ea dZ of Z credit Z research Z in Z Singapore Z at Z Nikko Z Asset Z Management Z Asia AZ“O is closure Z is Z defi Zn it el yZnotZi nZ aZ timely Z manner Z and Z generally Z companies Z will Z not Z talk Z about Z this Z unless Z asked A”
Shin aZ Sh eng xi nZ International ZS red it Z a a ting Z So AZ sometimes Z has Z to Z resort Z to Z sources Z other Z than Z the Z company Z in Z question Z to Z obtain Z guarantee Z data A
“EhenZwekveZdoneZon-siteZdueZ diligence Z on Z some Zr ate dZfi Zr ms, Z it Z was Z hard Z to Z get Z comprehensive Z and Z reliable Z information Z about Z their Z external Z guarantees ,” Zs ai dZ KongZLingqiang,Z Beijing-based Z vice-president Z at Z Shin aZ Sh eng xi nA Z The Z central Z bank Z should Z allow Z ratingZassessorsZaccessZtoZtheZnationalZ fiZnancialZcreditZsystemZtoZgetZtheZlatestZ informationZaboutZcompanieskZpledgesZ forZloans,ZKongZsaidA
ShinaZBondZaatingZSoAZsaidZguarantorsZshouldZdiscloseZguaranteesZinZ quarterlyZreportsZandZalsoZreleaseZ informationZaboutZtheZfiZrmsZforZwhichZ theyZprovideZtheZbiggestZpledgesA
“SrossZguaranteesZforZunrelatedZ companiesZcouldZleadZtoZcontagionZandZ evenZsystemicZrisk,”ZsaidZXiaZLe,ZHongZ Kong-basedZeconomistZatZBancoZBilbaoZ DizcayaZArgentariaZSAAZ“SinceZtheZcentralZ bankZhasZstartedZtightening,ZmoreZhiddenZcrossZguaranteesZmayZemergeA”
TheZpledgesZsparkedZaZcrisisZinZtheZ easternZprovinceZofZZhejiangZinZJIHJZ duringZaZmonetaryZtighteningZcycle,Z promptingZ6IIZcompaniesZtoZaskZforZ theZprovincialZgovernmentksZhelp,ZaccordingZtoZ21st Century Business HeraldZ atZtheZtimeA
“InZShina,ZthisZpracticeZhasZ stemmedZfromZaZstructuralZdefiZciencyZ ofZtheZbankingZsystemFZsinceZprivateZ companiesZhaveZdiffiZZcultiesZaccessingZcreditsZfromZbanks, boostZtheirZfiZnancialZprofiZleZbyZformingZ complexZwebsZofZrelationship-basedZ crossZguarantees,”ZsaidZaaymondZ Ceung,ZchiefZgreaterZShinaZeconomistZ atZAustraliaZ&ZNewZZealandZBankingZ NroupZLtdAZ“TheZtoxinZwillZsurfaceZ whenZtheZmonetaryZconditionZstartsZtoZ tightenA”Z—