China's Web Of Private Debt A fragile web of cross-guarantees on corporate debt could unleash a chain of private defaults in China's industrial heartland. But workers are confident they'll be bailed out, again.

China's Web Of Private Debt

China's Web Of Private Debt

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A fragile web of cross-guarantees on corporate debt could unleash a chain of private defaults in China's industrial heartland. But workers are confident they'll be bailed out, again.


China's economy is growing at its slowest pace in nearly 30 years, thanks in part to its prolonged trade war with the U.S. In China's industrial heartland, many companies are unable to keep up with their mounting debt. This matters because it points to how fragile the financial system of the world's second-largest economy is. NPR's Emily Feng reports from China's Shandong Province.

EMILY FENG, BYLINE: SNTON Group makes steel cords and other products. It's one of the biggest employers in Dongying County here in Shandong Province. And in March, it filed for bankruptcy. But while that sounds ominous, employees in this company-run dormitory are actually quite cheery.

UNIDENTIFIED PERSON #1: (Through interpreter) Wages haven't stopped at all. I did hear that we had some financial problems, but we're still hiring.

FENG: Like everyone in this piece, this worker declined to give their full name because they're not allowed to talk to foreign media. Salaries remain high here at SNTON, so employees want to stay. One of them, Swin (ph), makes steel wires and has no plans to leave.

SWIN: (Through interpreter) We've been working the entire time. There's been no breaks at all.

FENG: Though SNTON's machines are humming, its finances are shaky. The company has amassed more than $2.2 billion in debt, but it stays afloat with a little help from its friends - its business friends. Companies in Shandong often guarantee each other's debt, putting up the collateral when a neighboring firm needs a loan. At any time, four or five companies might be backing each other's debt.

Cindy Huang, a senior director at ratings company S&P Global Ratings, says these guarantees are part of Shandong's business culture.

CINDY HUANG: The founders are quite close-knit, so they've known each other for many, many years. So I think from a personal relationship perspective, they provide support to each other.

FENG: That support has its downsides when loans go sour, and that's happening more often now. China's economy is slowing, and companies are having a harder time paying their debts. Across China, companies defaulted on $8.7 billion worth of loans in the first half of 2019. And because all these companies are backing each other's loans, it can make default contagious.

HUANG: The cross guarantee can bring down an otherwise relatively healthy company, you know?

FENG: Because when one company defaults, all the other companies are on the hook for their loans. SNTON, for example, was guaranteeing two other companies, now bankrupt. A fourth was guaranteeing SNTON's debts. These cross guarantees are most common in Shandong, which is also the province with the highest number of defaults this year. But when private firms get in really serious trouble, the government often steps in with help. That's what's happened with SNTON and another major employer here.

MICHAEL PETTIS: What they're doing is they're transferring the losses to other entities.

FENG: Michael Pettis is a finance professor at Beijing's Peking University. He explains how China's state control over every major financial institution allows it to just move debt around rather than reducing it. That also means...

PETTIS: There's no lending discipline. You don't really care who you lend to because the government's going to step in.

FENG: Belief that the government will fix your debt problems has become central to keeping China's bank system running.

PETTIS: So every time they come to the edge of the cliff, they look down, and they panic. And then they step away from the edge of the cliff. So no one ever really loses money.

FENG: Hence the cheeriness among SNTON's workers, like this one from Jiangsu Province, now at SNTON for eight years. Some workers quit when they learned SNTON was bankrupt - not her.

UNIDENTIFIED PERSON #2: (Through interpreter) If we're worried, SNTON's chairman is even more worried. He will do something. I have confidence in the company.

FENG: And, she adds, if the company's chairman can't do anything, government will.

Emily Feng, NPR News, Shandong Province, China.


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