STOCK MARKET WATCH - Thursday, 22 March 2012

[Demeter]

32. IS THIS WHY? Fool’s gold behind Beijing loan guarantees Firm accused of ‘wealth management’ schemes

http://www.marketwatch.com/story/fools-gold-behind-beijing-loan-guarantees-2012-03-21?siteid=YAHOOB

The domino effect began in January when bankers reacted to rumors of a liquidity crunch at one of Beijing’s most prominent loan-guarantee firms, Zhongdan Investment Credit Guarantee Co. Several banks that cooperated with Zhongdan smelled trouble and started calling loans they had issued to companies backed by the firm. At the time, Zhongdan counted more than 300 clients and 3.3 billion yuan ($523 million) worth of loan guarantee contracts, according to the firm’s President Liu Hui...The next domino fell when the creditor companies, seeking to appease the banks, turned to Zhongdan for help repaying the called loans. But Zhongdan executives balked, and the domino effect accelerated as companies teetered under bank pressure and the city’s business community shuddered with credit freeze fears...Now trying to sort out the Zhongdan case are the loan guarantor’s executives, its hundreds of business clients, some of China’s top banks, and officials with Beijing’s Municipal Finance Bureau and Banking Regulatory Bureau.

On Feb. 29, responding to calls for regulator intervention from a number of Zhongdan customers, the bureaus formed an emergency work group. Since then, the group has been documenting Zhongdan’s assets and liabilities by interviewing its clients’ financial officers, lawyers and bank officials. A Zhongdan manager said the firm is negotiating with more than a dozen banks in hopes of weathering the storm and satisfying clients. It’s also asked the banks to help by allowing the withdrawals of its 210 million yuan in margin deposits.

Caixin learned from sources close to the case that Zhongdan’s managers convinced executives at many small and mid-sized companies to participate in its so-called wealth-management investment schemes, using their borrowed money. Under the arrangement, a participating company would take out a bank loan and give some of the money to Zhongdan for investing in high interest-paying wealth management products for a month or more. The firm then apparently put those funds to work by buying stakes in small companies such as pawnshops and investment consulting firms, according to the sources. Some of the funds went toward a U.S. consultancy that later failed. This complicated, gray-zone money game ended with a bang when banks started calling the company loans. Most loans the firm’s customers owed to banks were scheduled to mature before summer. But as of early March, some were already overdue. Caixin learned that Zhongdan’s 1.2 billion yuan asset pool includes 210 million yuan held by banks as margin deposits for guaranteed loans. Only about 5 million yuan of that amount was immediately accessible when clients started clamoring.

In hopes of resolving the subsequent disputes between Zhongdan, its clients and banks, officials at the financial bureaus recently met with heads of 18 affected banks and Zhongdan executives. “Of first importance is to determine the depth of the hole,” Beijing Finance Bureau Deputy Director Li Zhigang said at the meeting. “If there are no new investors and no new liquidity replenishments, Zhongdan won’t be able to repay.” For now, banks have frozen Zhongdan’s deposits. A source at one bank said there may be no choice but to file a lawsuit against the firm.

CHINA JUST HAD ITS LEHMAN BROS., I THINK