The loan guarantee scheme described in this Reuters story is analogous to mortgage insurance during the U.S. housing bubble. In a crunch, either the government lets the loans collapse (because the guarantee firms do not have enough capital to reimburse the insured losses of banks and other lenders), or it sustains the guarantees with a huge injection of cash. In other words, let a big crisis develop, or encourage reckless lending going forward "because the government will step in."
--- Chinese province's debt crisis exposes economic fault line By Shu Zhang and Matthew Miller, Reuters, Aug 20, 2015 Beijing - A mini debt crisis in northern China is exposing cracks in a financial pillar of the country's economic revival plan: the $430 billion loan-guarantee industry. China has a heavy corporate debt burden and its economy is slowing, putting borrowers under strain, but many lenders take comfort from the fact that their loans are insured against default through the nation's almost 8,000 guarantee companies. Hebei Financing Investment Guarantee Group has sold too many guarantees, too cheaply, on loans that have now gone sour. Companies such as Hebei Financing are obliged to sell guarantees to borrowers at low rates of interest to underpin finance for smaller businesses. Many of these borrowers are in danger of default, presenting Hebei Financial with the prospect of having to pay out 32 billion yuan ($5 billion) in loan guarantees, which would wipe out its registered capital of 4.2 billion yuan. Given the company is unable to meet all its guarantees, lenders face large losses unless they can persuade the Hebei government to intervene and bail them out. Eleven of them recently petitioned the provincial government to stand behind Hebei Financing's guarantees. The letter, reviewed by Reuters, was written by 10 trust firms and one fund manager, which raised funds from the public before on-lending them. If the guarantees are not honored, they may default in turn on returns pledged to their own investors. Beijing is moving to strengthen the system and unveiled plans last month to set up a national financial guarantee fund to back provincial guarantee firms such as Hebei Financing. But it risks reinforcing the assumption among lenders that governments will bail them out and encouraging reckless lending. Excerpts from http://www.reuters.com/article/2015/08/21/us-china-economy-guarantees-insight-idUSKCN0QP28T20150821 _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
