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"This Could Be The Last Straw" 90% Of China Loan Guarantors Bankrupt

Tyler Durden's picture


In Wenzhou - dubbed the capital of China's private businesses - nearly 90 per cent of loan guarantors have failed since the start of the credit crisis arising from the underground banking system, according to the media. As SCMP reports, although their services are critical for the economic system and the millions of small firms - that provide the majority of the mainland's jobs - hundreds of loan guarantee groups are creaking under the weight of bad loans and are simply unable to bear any more. "It could become the last straw that breaks the camel's back," exclaims the head of a local law firm, "without the privately owned small businesses, China's economy won't have a future." But PMIs are up so everything's fine?


As The South China Morning Post reports,

Mainland loan guarantors have found themselves ensnared in the woes of the underground banking sector following a fresh wave of bankruptcies around the country.


Creaking under the weight of bad debts, hundreds of guarantee groups would be unable to bear even more, although their services are critical for the economic system and the millions of small firms that provide the majority of the mainland's jobs.


"It is by all means a risky business," said Wang Xiao, a Zhejiang entrepreneur who invests in a loan guarantee business. "An increasing number of loan defaults will soon force us to close down the business."


In Wenzhou, nearly 90 per cent of loan guarantors have failed since the start of the credit crisis arising from the underground banking system, according to the media.


The city, dubbed the capital of China's private businesses, had pinned hopes on the companies offering capital guarantee services to bail out troubled small companies when Beijing allowed it to legalise the underground banks.


"It could become the last straw that breaks the camel's back," said Yan Yipan, the head of law firm Zhejiang Panyuan, which mainly deals with cases related to financing. "Without the loan guarantee services, it will be more difficult for small companies to do business."


Rampant loan-shark schemes in Wenzhou resulted in the collapse of the city's economy, with dozens of underground banking operators and investors either committing suicide or fleeing the country.


The government felt loan guarantors could bridge the gap between cash-hungry businesses and financial institutions. Borrowers without enough collateral could use loan guarantee services to access much-needed funds. The guarantors normally charge 3 per cent of the loan amount as fees.


"Three per cent fee looks good, but a loan default would be equivalent to the total profits made from dozens of deals," Wang said.


At the end of last year, there were more than 8,000 licensed loan guarantors, with most of them focusing on serving small enterprises. The companies had a combined registered capital of 880 billion yuan (HK$1.1 trillion), according to the China Banking Regulatory Commission.


Online consultancy Forward said financing demands from the small firms topped 16 trillion yuan in 2012. Indeed, thousands of illegal loan guarantors have been offering guarantee services for the underground banks in the past decade. In April, a bank run in Sheyang, Jiangsu province, was sparked by the collapse of illegal loan guarantors.


In Guangdong, the financial authorities said more than 30 loan guarantors had failed so far this year, while in Sichuan, the provincial government revoked 12 loan guarantee licences. The problems with loan guarantors would weigh further on a mainland leadership already buffeted by complaints about the way government treats small firms.


"Without the privately owned small businesses, China's economy won't have a future," said Song Weiping, the chairman of developer Greentown China. "They are the babies and they should be looked after carefully."

*  *  *

As with any centrally planned economy, the facts are nebulous but it seems that between record low coal prices, multi-month high money market rates (demand for liquidity), multi-month lows in employment indices (under the covers of the PMI headlines), and the ongoing CCFD ponzi unwind that things are far from the picture of stability painted to the rest of the world.

Of course, any further actions by the government to control (or help) the situation may end up looking this...


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Mon, 07/07/2014 - 12:23 | 4931806 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Game over bitchez!

Mon, 07/07/2014 - 12:41 | 4931881 Stackers
Stackers's picture

Must have copied the FDIC/AIG operating manual. You have insurance as long as everyone doesn't need it at the same time.

Mon, 07/07/2014 - 12:44 | 4931899 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Long nail guns!!

Mon, 07/07/2014 - 12:46 | 4931909 max2205
max2205's picture

And ugly babies at that

Mon, 07/07/2014 - 13:09 | 4931999 Manthong
Manthong's picture

“But PMIs are up so everything's fine?”

So is Peter Pan.

Mon, 07/07/2014 - 13:22 | 4932042 DoChenRollingBearing
DoChenRollingBearing's picture



Brazil.  Russia.  India.  China.

The BRICs are not all they are cracked up to be.  We have our problems, but so do they.  Keep working, saving and preparing.  Better here than "over there" in the BRICs.

Mon, 07/07/2014 - 14:05 | 4932251 Panafrican Funk...
Panafrican Funktron Robot's picture

The USD financialized concept of "BRICs" is predictably crashing and burning (shit, the very concept was created by a Goldmanite; what side of the trade would you be on?), but that's different from saying that they are in bad shape vs. the US.  Energy, raw materials, manufacturing, and precious metals (esp. gold) vs. toilet paper and farming (which will be way less productive sans cheap energy).  

Mon, 07/07/2014 - 17:08 | 4933093 ElvisDog
ElvisDog's picture

China doesn't quite stack up in your score card: Energy=Nope, Raw materials=Nope, Manufacturing=Yes (but not much good without #1 and #2), precious metals=Yes, Farming=Nope (not enough and soil degrading).

Tue, 07/08/2014 - 03:16 | 4934578 Laowei Gweilo
Laowei Gweilo's picture

btw WTF would call Wenzhou "the capital of China's private businesses"


seriously? Tier 1 cities take bigger shits than Wenzhou...

Tue, 07/08/2014 - 08:39 | 4934886 old naughty
old naughty's picture


The Wenzhou "gang" as  they're referred to often, owns more real estates than any other institutes. And they're notorious in speculative tactics (pump up of course). Private because they're "private enterprises" (funded by banks of course).

Mon, 07/07/2014 - 16:27 | 4932955 Omen IV
Omen IV's picture

so that's where Cassano and his business model ended up

Mon, 07/07/2014 - 12:24 | 4931811 jubber
jubber's picture

Hang Seng futures....up!

Mon, 07/07/2014 - 13:21 | 4932035 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Of course duh.

Mon, 07/07/2014 - 14:02 | 4932227 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

blah blah, sky is falling, blah blah, doesn't matter in the global print-fest, nominal way up, real way down, blah blah collapse on its way blah blah

Mon, 07/07/2014 - 17:11 | 4933104 ElvisDog
ElvisDog's picture

I disagree. The loan guarantor story is a big deal, because the main reason why the Shadow Banking system in China has been so reckless has been these so-called guarantors and an implicit belief that the Chinese government will bail them out. The guarantors collapse or simple exhaustion will put everything on the government, which can't bail out all the shadow bankers. It has the potential to be a Chinese Lehman moment.

Mon, 07/07/2014 - 12:26 | 4931820 buzzsaw99
buzzsaw99's picture


Mon, 07/07/2014 - 12:26 | 4931821 Little Boomer
Little Boomer's picture

Don't watch that video!

Mon, 07/07/2014 - 12:34 | 4931851 Skateboarder
Skateboarder's picture

Too late. Perhaps "standing human" oughta replace "sitting duck".

Mon, 07/07/2014 - 12:30 | 4931840 pods
pods's picture

China is going to be needing a couple heaping teaspoons of Miralax in their Escolar soup to get things moving on the credit front.


Mon, 07/07/2014 - 12:32 | 4931841 NoDebt
NoDebt's picture

"nearly 90 per cent of loan guarantors have failed since the start of the credit crisis arising from the underground banking system, according to the media."

Wait.  WHICH credit crisis are we marking as the beginning?  The latest one with the copper and steel?  The 2008 banking crisis?  The Asian debt crisis in the 90s?  Or maybe the Boxer Rebellion?

Dammit, I can't keep track of all the crises!

Mon, 07/07/2014 - 12:31 | 4931843 starman
starman's picture

Cant we just sell them that thing called "recovery"? It worked for the US.

Mon, 07/07/2014 - 12:34 | 4931850 Dr. Engali
Dr. Engali's picture

Okay that was fucked up.

Mon, 07/07/2014 - 14:44 | 4932043 Urban Redneck
Urban Redneck's picture

Fire Retardant Materials.

I can understand some sheeple buying artificial fabrics (the pre-soaked in accelerant part is inexcusable) either out of economic necessity or ignorance, but it sort of exposes the utter fallaciousness of those who say China schleps shit to white man, and keeps the their A-OK #1 quality production (e.g. public transport and infrastructure) for themselves.

Mon, 07/07/2014 - 12:35 | 4931859 youngman
youngman's picture

Its so underground...that no one knows what the hell is going on....I love an economy built on the underground bank loans....its got to be good...just sign on the dotted line..or is it just a handshake...

Mon, 07/07/2014 - 12:54 | 4931939 NEOSERF
NEOSERF's picture

HFT "liquidity" which creates confidence, bid rigging, data manipulation, black markets and dark pools, the engine of a healthy economy.

Mon, 07/07/2014 - 12:36 | 4931865 yogibear
yogibear's picture

China needs to build more ghost cities and get Wall Street fund manager hot money invested.

Then all of it can disappear.

There is a con/scam to be made somewhere in the world.

Mon, 07/07/2014 - 12:42 | 4931874 QQQBall
QQQBall's picture

I know. Sell each other insurance!

On the bright side - 1 more bus will be added to next quarter's GDP

Mon, 07/07/2014 - 12:39 | 4931876 MASTER OF UNIVERSE

Economic earthquakes from financial fracking cannot be stopped IMHO. If China is showing cracks then the USA must be showing cracks as well. Given the de-Americanized position that China is taking towards US currency one has to wonder why Z/H is not exposing the USA cracks at the same time. In brief, how many lenders have gone down in the USA in the last year due to default on small business loans?
Moreover, my understanding of small business loans is that the big too-BIG-to-fail banks are not lending to small business just like China has not been lending to small business. Where are the parallels between the USA and China?

Mon, 07/07/2014 - 12:42 | 4931889 marathonman
marathonman's picture

You're MASTER OF UNIVERSE.  You tell us where the parallels are!

Mon, 07/07/2014 - 14:07 | 4932262 MASTER OF UNIVERSE

Ukraine is the parallel and I am MASTER OF UNIVERSE when it comes to blowing up the world. I am not MASTER OF UNIVERSE when it comes to putting it all back together again. If all the King's horses and all the King's men could not put Humpty Dumpty back together again why should I be expected to do it when in fact that is not how this story ends? Contagion

in markets will not abate until the markets and market players are as

dead as the markets. A complete reset is the only solution that I can come up with today. I'm MASTER OF UNIVERSE and not 'Wizzard of Oz' like

Tim Geithner, Alan Greenspan, Ben Bernanke, or Janet Yellen. I don't get paid to provide the USA with solutions. If the USA wants to hire me on a contractual basis I am open to offers! Until that time manifests I am merely MASTER OF UNIVERSE when it comes to blowing up the world. In brief, I can't walk and chew gum at the same time unless

I am paid for it like Hank Paulson was paid for it.

Hash, grass, or ass, no one rides for free and that includes the USA.


Mon, 07/07/2014 - 22:57 | 4934229 StychoKiller
StychoKiller's picture

It's easy, repeat after me:  "BY THE POWER OF GREYSKULL!"

Mon, 07/07/2014 - 23:25 | 4934305 MASTER OF UNIVERSE

Grandfather Greenspan was the Grandmaster Wizzard and Bernanke

is just the Cowardly Lion. Dorothy [aka Janet Yellen] is busy tapping her

ruby red slippers together in hopes that the Good Witch of the North

 will come back and re-read the instructions on how to get home again?

Unfortunately, Greenspan had dementia when he tapped Yellen for the appointment and that's why she can't run the levers of power behind the curtain like Greenspan did.  Greenspan forgot how to run the world

and waited too long to retire. The USA will be forever behind the eight ball because of Grandmaster Wizzard Greenspan. Bernanke is just a secondary character and nothing more.


Mon, 07/07/2014 - 12:42 | 4931890 MsCreant
MsCreant's picture

Hire Hank Paulson, he'll know what to do!

Mon, 07/07/2014 - 13:06 | 4931984 Cthonic
Cthonic's picture

Along with his three stooges, Kashkari, Orszag, and Geithner.  Bernanke is available these days as well...  please China we'll trade them all for a couple of pigs in a river.

Mon, 07/07/2014 - 12:44 | 4931893 Dr. Engali
Dr. Engali's picture

The fact that somebody thought it was a good idea to build empty cities is insane, but what's even crazier is a bunch of people decided it was a good plan. It's like the drunk at a keg party who says " hey I have an idea" you know it's going to end badly, but people still go along with it anyway.

Mon, 07/07/2014 - 12:53 | 4931936 pods
pods's picture

It ended badly Doc, but we at least lived.  :)

BTW, kids, don't fill an empty liquor bottle up 3/4ths with gas, place the cap back on, and place vertically in a fire.

I think we scared the shit out of the guys in MIR.


Mon, 07/07/2014 - 13:24 | 4931994 Dr. Engali
Dr. Engali's picture

Lol. I've got a few stories myself..... one of them invloves a crane... How I survived my early 20s is a mystery.

Mon, 07/07/2014 - 13:08 | 4931997 cro_maat
cro_maat's picture

So horizontally it is. Thanks for the tip.

Should we still roast marshmellows?

Mon, 07/07/2014 - 13:43 | 4932126 ThroxxOfVron
ThroxxOfVron's picture

"The fact that somebody thought it was a good idea to build empty cities is insane, but what's even crazier is a bunch of people decided it was a good plan. It's like the drunk at a keg party who says " hey I have an idea" you know it's going to end badly, but people still go along with it "


I protest !

This level of stupidity is NOT generally associated with alcohol.

This is clearly a serious hard drug binge level stupidity problem.  

My suspicion is that China White is at the bottom of this whole empty cities fiasco.

We Tu Lo is not Yu Tu Hi

Mon, 07/07/2014 - 12:43 | 4931895 El Vaquero
El Vaquero's picture

China could end up selling USTs not out of malice, but out of desperation. 

Mon, 07/07/2014 - 13:08 | 4931996 Cthonic
Cthonic's picture

Nah, they'll just pack them off to London and re-re-re-rehypothecate them, all the way home.

Mon, 07/07/2014 - 18:15 | 4933340 ThroxxOfVron
ThroxxOfVron's picture

Why just sell 'em once when You can sell 'em three or a dozen times?

Let's play Copper Paper Swissys...

Mon, 07/07/2014 - 12:43 | 4931896 QQQBall
QQQBall's picture

The Chinese don't stand a chance. WS has been cratering national economices for a long time.

Mon, 07/07/2014 - 12:45 | 4931904 orangegeek
orangegeek's picture

oh well, build another city - that should fix it

Mon, 07/07/2014 - 12:55 | 4931946 NEOSERF
NEOSERF's picture

Boy, the next one is going to be a doozy!

Mon, 07/07/2014 - 12:57 | 4931957 Loucleve
Loucleve's picture

Felix Zulauf predicted in the annual Barrons Roundtable that China's problems would be a second half 2014 issue.

Mon, 07/07/2014 - 13:07 | 4931989 yogibear
yogibear's picture

California gets more trash from Japan's super typhoon.

Mon, 07/07/2014 - 13:09 | 4931998 giorgioorwell
giorgioorwell's picture

Oh, another "last straw" what point does ZH throw their hands up and give up....5 years from now? 

The day ZH capitulates is the day the market actually does crash.

Mon, 07/07/2014 - 13:34 | 4932082 astoriajoe
astoriajoe's picture

"at what point does ZH throw their hands up and give up"

I think the argument could be made that that point was reached, and then ZH was born. At least that's how I'm looking at it.

Mon, 07/07/2014 - 15:38 | 4932756 medium giraffe
medium giraffe's picture

I've never seen a turd take this many flushes and keep floating, it's fascinating. 

Mon, 07/07/2014 - 13:13 | 4932011 Dragon HAwk
Dragon HAwk's picture

Insurance ? We don't need any Stinking Insurance....

my brother in Law promised me 5% so i borrowed at 3% from a Guy who Got a loan at 2....

Haven't seen My Brother in Law in a While...

Mon, 07/07/2014 - 13:33 | 4932076 Jason T
Jason T's picture

Tragic that bus .. not for the greater good that one.

A wildfire in a forest however is for the greater good .. just as is a recession.  Burn up the deadwood and burn up the bad loans.  Allow for the creative destruction to play out.  One step back, two steps forward.

This credit crunch should prove good in the long run for China I would bet. 

Mon, 07/07/2014 - 13:49 | 4932161 Ban KKiller
Ban KKiller's picture

But who will build the nailguns? 

To correct this short term problem just hire some ex Enron acountants, right? What do you need the books to say?

Mon, 07/07/2014 - 14:04 | 4932244 Bennie Noakes
Bennie Noakes's picture

No problem! The Chinese just need bundle those loans into securities and sell them yield-hungry investors. Who says you can't make a silk purse out of a sow's ear?

But this idea seems really familiar. I wonder if anyone has tried it before?

Mon, 07/07/2014 - 14:05 | 4932248 Bennie Noakes
Bennie Noakes's picture

Dup deleted.

Mon, 07/07/2014 - 16:04 | 4932863 Pinstripe
Pinstripe's picture

Where is your God now Jim Rogers?

Mon, 07/07/2014 - 16:23 | 4932942 barre-de-rire
barre-de-rire's picture

come on  baby light my fire....

Mon, 07/07/2014 - 18:36 | 4933418 AdvancingTime
AdvancingTime's picture

 Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need. Like a plane on autopilot China continued in the direction it had been on.

Now China finds itself in a credit trap. For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.

Mon, 07/07/2014 - 23:30 | 4934318 RagnarDanneskjold
RagnarDanneskjold's picture
Credit Guarantee Firms Go Down Like Dominoes

 "The profit model is an important reason for the large-scale collapse of credit guarantee firms, a 2% profit is not sufficient for taking on 100% of the risk."

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