Neutral Monetary Policy and Shandong Debt Implosions
I covered the exploding Shandong debt situation here two week ago: Shandong Bad Debt Daisy Chains Exploding, Loanshark City Falls on Hard Times. One feature was the credit guarantees blowing up as one default takes down multiple divisions of a company, setting off daisy-chains of mutual credit guarantees across an entire local economy. Supposedly this crisis passed with a debt payment on Friday, but more are coming so long as the central bank doesn’t pump credit into the economy.
Now the SCMP is on the case: Debt distress in Shandong province illustrates risks of interlocked credit guarantees
At the centre of the financing circle was Qixing Group, whose management had now effectively been taken over by Xiwang Group under the direct instruction of the local government in Zouping county, Xinhua reported.
On Wednesday, Qixing was reported to have defaulted on a bank repayment worth up to seven billion yuan (US$1 billion), causing a plunge in the shares of Xiwang Foodstuffs, the Shenzhen-listed arm of Xiwang Group.
Investors were selling their shares in Xiwang Foodstuffs in a panic because its parent is the biggest guarantee provider for Qixing. In the event that Qixing were to fail, Xiwang would potentially be on the hook for 2.9 billion yuan in outstanding debt.
…In addition to Xiwang Foodstuffs, Xiwang Group also controls Xiwang Steel and Xiwang Property Holdings, both listed in Hong Kong.
Another important issue was the size of the cross-guarantee web, Chung said.
Local media group Shandong Business News reported that more than 10 billion yuan worth of loans were extended to Qixing and several other local companies, which provided guarantees for each other.
…Meanwhile, investors are dumping the bonds issued by China Hongqiao Group and Weiqiao Textile, two other listed companies based in Zouping.
It is not known if these two firms are involved in the credit chain. Short-selling institution Emerson Analytics earlier issued a report claiming Hongqiao inflated its profit, sparking a sell-off in the stock.