Eleven private lenders have written an open letter to a top government official in the China province of Hebei, asking for help to backstop non-performing loans, according to the Financial Times.
The largest loan guarantee company in the northern province, Hebei Financing Investment Guarantee Group, has guaranteed 50 billion RMB ($7.8 billion; €7.1 billion) in loans from nearly 50 financial institutions, according to Beijing-based publication Caixin. More than half of that total is non-bank lenders, mainly trust companies, which lent to property developers and factories.
The lenders and their investors have been worried for some time that the capital is at risk since they discovered the Hebei group doesn’t have enough capital to back guarantees. Some banks are calling in loans backed by the guarantee company, Caixin reported in April.
The eleven lenders have sold 24 wealth management products (WMPs) worth 5.5 billion RMB. If the guarantor doesn’t guarantee the loans then at least 24 WMP could be at risk of defaulting.
The letter appeals to government concerns about retail investors being wiped-out, citing that the firms represent more than a thousand investors.
The Hebei group is wholly-owned by the provincial regulator of state-owned assets. The perception in China during the last few years of a credit boom is that the government would backstop all defaults. However, with the recent slowdown, and various government interventions such as devaluation of the yuan, there is uncertainty amongst investors about what will happen next in China. Asked what the government might do, a market source said: “It’s hard to speculate on what the government will do.”
“For the trust companies, there are certain mechanisms in place, they have access to restructuring through the asset management companies, tools that give them flexibility to work-through loans, rather than just sell off,” he said.
The private lending market is estimated to be around $5 –$7 trillion in China, according to one market source, citing figures from the Financial Stability Board, which published a peer review last week focusing on the trust sector and WMPs. In it, the review called them a key funding source for the non-bank sector.
“From a strictly legal perspective, it is investors rather than banks that bear the risks of WMP and trust investments. However, in practice banks may be keen to avoid the perception of default in these products and guard against any reputational risk. The CBRC (China Banking Regulatory Commission) should, in its internal stress analysis, assess how far banks (both individually and collectively) may be willing to go to protect investors and to absorb the ensuing financial costs – the objective being to ensure that those banks internalise such risks,” the report said.