Cross-posted from Investing in Chinese Stocks.
In Sichuan province this summer, Huitong Credit Guarantee went bust. I covered it here: Largest Privately Run Credit Guarantee Firm in Sichuan Goes Bust
The executives of Sichuan’s Huitong credit guarantee have “lost contact” and the status of ￥5 billion worth of loans are up in the air. The offices of the executives were sealed by police on July 9. The firm is the largest privately run credit guarantee firm in Sichuan. The local government is temporarily taking over operations and has instructed the banks to continue working with the firm.
…Huitong has worked with more than 20 banks, several trust companies and even public housing funds. The largest amount of the outstanding ￥5 billion in credit is bank loans, worth about ￥4.5 billion. The rest is with other firms, as well as some loans made directly by the credit guarantee firm. If some loans backed by Huitong are to other credit guarantee companies, legal action by the banks could result in yet more falling dominoes.
Turns out there are a lot of dominoes.
A new article from iFeng (link and Google translation below) details the credit carnage. Thus far there are individual cases in the amount of ￥200 million; ￥200 million; ￥90 million (boss leaped to his death); ￥200 million; and ￥70 million. These all emerged in September and October, with the trust/ investment company bosses going missing, committing suicide or being apprehended by police.
Due to the wild growth in the private fundraising/shadow banking sector, it’s expected that losses will continue emerging into the middle of 2015.
Credit growth has completely halted. From the article below:
“I’m sorry, now there is no financing available for investment projects.” “Now the main task of the company is to complete existing projects, only manage the existing capital, not grow it.” Reporter walked into a number of financial companies, the answer is the same.
At the office of Chengdu’s (capital of Sichuan) Xida Financial Supermarket Building 3, you can still rent empty space for ￥80 per sqm. Others who moved in early are paying ￥260 per sqm; prices have collapsed 70%. The sales agent tells the reporter, “If you don’t believe me, I’ll show you other companies’ rental contracts, but you have to keep it a secret. If you can move in before November 8, we can discuss the price further.”
Rent no doubt was high due to growth in investment management/ advisory firms. At end of December 2013, there were nearly 5,000 of these financial firms, an increase of roughly 4000 from June of the same year! Sichuan’s provincial government counted 509 firms involved in credit guarantees at the end of 2013, with a ￥233.8 billion guarantee balance and 730,000 households served, making Sichuan province the second largest market in the country. Central bank data from the end of June 2014 counted 326 small lending companies in Sichuan, ninth in China, with ￥59.7 billion in loans, fourth in China.
41.4% of western Chinese SMEs need credit and 57.2% of those credit needs are met with private fundraising (shadow banking). Average interest rates are 19.1%, well above the 9.7% annual rate for bank credit. Since they have no credit guarantee or collateral, 72.1% of small businesses are forced to use private fundraising. In Chengdu, there are investment products on the market today offering 15% to 18% returns, well above the 7% offered by bank trusts and WMPs.
Are you ready for the punchline? One insider estimates that 80% of this private credit flowed into real estate. Thanks to the rapid growth of the real estate industry, some developers were (successfully) paying 100% annualized interest rates and even the common people were spoiled, with investors refusing to even look at wealth product yielding under 20%.
Real estate investment has actually ticked up in the second half of the year (through the September data), but the cooling market is wreaking havoc among high interest rate debtors. I would not bet on that number holding up in the coming months.
This is a textbook credit bubble, with explosive growth right before the peak. The 400% growth in investment firms in the last 6 months of 2013 is off the charts. The major domino in the private fundraising market fell in July 2014, and the knock on dominoes started going down in September and October. Real estate investment hasn’t contracted yet, but it likely will. Then it may take a few more months for the suppliers to get into trouble, later the construction equipment companies that sold cement mixers and excavators on credit may find they have bad debts on their balance sheets. This credit bust is still in the early innings…民间借贷崩盘潮蔓延：80%资金流向房地产
