Shaky companies can drag down solvent ones, regulator says

The China Banking Regulatory Commission is strengthening its efforts to oversee joint-guarantee loans for fear risk will be transmitted from one company to another if the Chinese economy keeps slowing down, Reuters reported.

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As it is hard for small and medium-sized enterprises to get loans from commercial banks in China for lack of collateral, some companies choose to form a mutual help group based on trust. If one of the companies applies for a bank loan, all members of the group are held jointly liable for the debt in accordance with the contract.

During a recent internal meeting, leaders of the CBRC told the banks to resolve and take precautions against risks caused by excessive credit guarantees. The regulators said the banks should put strict restrictions on borrowers' subsequent attempts to receive a guaranteed loan in credit contracts to prevent the companies from over-indebtedness, Reuters said.

E-mailed questions sent to the CBRC were not answered by press time.

Joint-guarantee loans used to be regarded positively, as one company helping another to overcome financial difficulties, but in recent years, it was found during a liquidity stress scenario that a well-managed company with good capital flow can become burdened by other companies' problems, said Zong Liang, researcher at the Institute of International Finance under the Bank of China Ltd.