Help wanted

Zhejiang bosses face road to ruin

Petitioning is an ancient Chinese tradition, a system by which those who feel wronged are able to complain directly to a higher authority. It is often a last-ditch plea for justice, the final resort of those unable to find redress by other means.

So there is plenty of symbolism in a recent petition signed by 600 private businesses in Zhejiang and sent to the provincial government. It suggests that local businesspeople feel so poorly treated by their banks that the only option is to take their case to the highest regional authority.

The petition pleads for emergency aid in the face of a local debt crisis brought about by the collapse late last year of a little known construction company (see WiC157). The situation became much more serious in recent weeks when a large local conglomerate, Zhejiang Zhongjiang Holdings, went bankrupt owing billions of renminbi (see WiC159).

Companies which signed the petition – including some of China’s top 500 private enterprises – are asking for the provincial government to set up a coordination group to deal with the crisis, reports 21CN Business Herald.

Furthermore, the signees want the government to persuade banks to stop recalling loans, as well as return some of the cash demanded on recently recalled loans, to give companies the time and the capital to survive their immediate funding crisis.

The banks have been recalling loans from businesses caught up in a complex web of mutual guarantees, where two or more companies agree to take reciprocal responsibility for each other’s debt.

This is a common arrangement in Zhejiang. But the province is now seeing the downside: when one party fails to meet its obligations, the other member of the contract has to pick up the bill.

That means that individual company failures have been feeding a chain reaction of financial distress.

There are also fears that the debt crisis could be contagious and is even starting to cross provincial borders.

“It is likely that the joint guarantee circle is spreading across regions,” a businessman in Zhejiang told 21CN. He warns that if his firm folds as a result of a loan guarantee agreement, his interests in neighbouring Jiangsu province will also be affected.

The petition is a last-ditch effort to buy some time for local companies, and stem the growing crisis by enrolling the help of the provincial government.

“We found that some of the corporate banks’ decisionmaking power lies in head offices outside of our jurisdiction,” a source from Hangzhou Furniture Industry Association explained to the newspaper. “The provincial level government must step forward to be truly effective.”

The Zhejiang government is aware of the worsening situation. The most recent data suggests that bad loans are climbing fastest in Wenzhou, the city in the south of the province and which is at the epicentre of the private loans scandal that erupted last year.

Non-performing loans in Wenzhou nearly doubled in the first half of the year to Rmb18.1 billion ($2.8 billion), which translates into an NPL ratio of 2.7%, reports the China Daily.

In the summer of last year – before the crisis broke out – the ratio was just 0.37%, one of the lowest in the country.

The debt panic also comes with a human cost, as lives and businesses are ruined by the need to repay debt. In a separate article, the China Daily points out that about 100 managers or heads of private companies in Zhejiang have either disappeared, committed suicide or declared bankruptcy since the credit crisis began last year. These businessmen incurred total debt worth at least $1.58 billion. None of this has been repaid to lenders.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.