China's second-largest loan-guarantee enterprise has suspended its guarantee business due to a payment crisis, media reported over the weekend, a move which analysts said might have a negative effect on a number of the country's financial institutions.
Hebei Financing Investment Holding Group, which has been beset by financial problems for a long time, suspended all its guarantee business and was officially put under the control of Hebei Construction & Investment Group (HCIG), the largest State-owned capital investment and operating enterprise in North China's Hebei Province, news portal cnr.cn reported on Saturday, citing unnamed sources.
The problem arose because a lot of small companies whose loans were backed by Hebei Financing had encountered financial problems and could not pay back their loans, Cao Xiao, a professor of finance at Shanghai University of Finance and Economics, told the Global Times on Sunday.
Hebei Financing and HCIG, both based in Hebei's capital city Shijiazhuang, could not be reached by press time.
According to a statement posted on Hebei Financing's website on Friday, provincial authorities in Hebei had decided to put the company under the control of HCIG.
"Hebei Financing will do its best to promote guarantee business development normally after the alteration and continue to assist small businesses in obtaining loans," the statement said.
Hebei Financing was set up by provincial authorities in Hebei in 2011 in a bid to support small and medium-sized companies by providing backing for their loans.
The company so far guarantees about 50 billion yuan ($8.1 billion) in loans which small businesses applied for from financial institutions such as commercial banks and P2P (peer-to-peer) lending firms.
If Hebei Financing suspends its guarantee business, the 50 billion yuan's worth of loans will face a risk of default and those financial institutions may suffer a loss, Cao said.
"It may influence investor confidence toward those institutions, particularly the P2P lending firms which have already faced huge financial problems," Cao said.
According to news portal nandu.com's report in December, about 50 P2P lending firms went bankrupt in 2014.
The fluctuations in the financial system may continue at a time when China's loan-guarantee enterprises are facing increased operational difficulties, Zhou Dewen, president of Small and Medium Enterprises Development Association in Wenzhou, told the Global Times on Sunday.
For instance, the number of loan-guarantee enterprises in Wenzhou, East China's Zhejiang Province, shrunk from around 300 at the sector's peak to about 30, according to Zhou.
The sector still lacks effective risk control, and operational difficulties facing small businesses also raised loan default rates and contributed to the increased bankruptcy risk for loan-guarantee enterprises, Zhou said.
The regulatory authorities are expected to strengthen supervision of loan-guarantee enterprises in the coming months to reduce risks from accumulating in the sector, Cao said.
