Debt guarantees spark default contagion

"Currently, Zhejiang's economic structural adjustment and (industrial) upgrading is at a critical stage. The risk from guarantee chains is still rather large," the Zhejiang branch of the China Banking Regulatory Commission warned in February.

Mutual guarantees

Unlisted polyester yarn producer Hangzhou Jianjie Chemical Fiber Co Ltd was recently liquidated following the default of another textile firm whose debts Jianjie had guaranteed, China Business News reported.

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Jianjie's collapse in turn affected five other textile firms. In all, 3 billion yuan ($480 million) in bank loans to the six firms are at risk, the paper said.

"After (Jianjie Chemical Fiber) went bankrupt and was liquidated, companies with mutual guarantees had to take on more debt," the paper quoted Zhu Rujiang, director of the Xiaoshan District Funding Chain Risk Prevention and Mitigation Leadership Group, as saying.

"They can still handle this debt, and they will have no trouble surviving, but a key requirement is that banks can't withdraw their loans," he said, according to the paper.

Zhu's group was set up to mediate between banks and companies, according to the district government's website. Zhu declined to comment when Reuters reached him by phone.

China Business News also reported that Hangzhou Zhongxin Steel Structure Manufacture Co Ltd, which makes scaffolding, had shut down and could place another 1.2 billion yuan in bank loans to four other companies at risk.

Zhongxin, whose website is no longer accessible, couldn't be reached for comment.

"The crisis of mutual guarantees is very serious and there is no good solution for this problem," said Zhou Dewen, vice chairman of the China Association of Small and Medium Enterprises in Wenzhou, another prosperous city in Zhejiang.