Shaky companies can drag down solvent ones, regulator says

The China Banking Regulatory Commission is strengthening its efforts to oversee joint-guarantee loans for fear risk will be transmitted from one company to another if the Chinese economy keeps slowing down, Reuters reported.

As it is hard for small and medium-sized enterprises to get loans from commercial banks in China for lack of collateral, some companies choose to form a mutual help group based on trust. If one of the companies applies for a bank loan, all members of the group are held jointly liable for the debt in accordance with the contract.

During a recent internal meeting, leaders of the CBRC told the banks to resolve and take precautions against risks caused by excessive credit guarantees. The regulators said the banks should put strict restrictions on borrowers' subsequent attempts to receive a guaranteed loan in credit contracts to prevent the companies from over-indebtedness, Reuters said.

E-mailed questions sent to the CBRC were not answered by press time.

Joint-guarantee loans used to be regarded positively, as one company helping another to overcome financial difficulties, but in recent years, it was found during a liquidity stress scenario that a well-managed company with good capital flow can become burdened by other companies' problems, said Zong Liang, researcher at the Institute of International Finance under the Bank of China Ltd.

"In the early days, people paid more attention to the bright side of joint-guarantee loans in terms of risk diversification. But now, they are becoming worried that financial risks will transfer to other companies if one member of the mutual help group is in trouble," Zong said.

The CBRC wants to warn banks of possible risk exposure in businesses such as steel trade enterprises in Jiangsu and Zhejiang provinces, especially at a time when the Chinese economy faces downward pressure. The problem is not considered huge, however, since most Chinese companies are cautious about joining a group that provides mutual credit guarantees, he said.

In regions where the problem of joint-guarantee loans is more serious, regulators have asked banks to maintain the current situation and wait until the economy gets better, rather than withdrawing their loans if they find a company has huge management problems, Reuters reported.

"We need to take steady measures to solve the problem," said Zong. "Sudden withdrawal of bank loans may break the capital chain of companies, thus exposing and widening financial risks. The banks should tolerate a company's slight drop in efficiency if the decline is generally caused by the economic slowdown."

The banks, however, will make their own decisions about withdrawing loans to avoid increasing their exposure to bad debt. Whether they will strictly follow the guidance of the CBRC remains to be seen, said Ni Jun, a financial analyst at Shanghai-based Greenwoods Asset Management Ltd.

jiangxueqing@chinadaily.com.cn