Aug 2, 1012
Translated by Zhu Na

Local governments across the coastal province of Zhejiang have launched emergency funds over recent days in a bid to provide emergency support to private companies that have been hit by a credit crunch triggered by the default of four companies in the region and exacerbated by the practice of companies mutually guaranteeing the debt of other companies.

Local governments have set up a special funds that will offer financial support to private companies that have had difficulty meeting the requirements laid down by the banks in order to roll over their loans and have run into cash-flow problems.

The government hopes to ease the credit crunch in the region which has resulted in many banks halting new lending to private companies.

Major cities in the province, including Hangzhou, Wenzhou, Ningbo and Jinhua in addition to a number of other cities and counties, have all launched such emergency funds.

The lending crisis was triggered after a scandal involving two companies, the Zhongjiang Holding Company (浙江中江控股有限公司) and the Tianyu Construction Group (天煜建设有限公司), led to banks urgently calling in loans, which in turn snowballed into a provincial-level crisis involving 600 to 700 companies and tens of billions of yuan.

In mid-July, over 600 well-known private companies in Hangzhou called on the Zhejiang provincial government to provide emergency assistance.

The government's offer of in effect providing commercial guarantees to private enterprises has been questioned by some experts

Wu Dong (吴冬), a Shaghai-based lawyer, noted that according to China's Guarantee Law (担保法), government agencies are not allowed to act as guarantors.

"From this angle, we can see that using government funds to help enterprises extend their loans is in conflict with the country's law," Wu said.

Yang Yiqing (杨轶清), from Zhejiang Gongshang University (浙江工商大学), said that by in effect taking on the role of guarantor, the government is taking on risk, but he also said that "if governments didn't do anything, there would even be more trouble."

Links and Sources
21st Century Business Herald: 浙江急救担保圈危机 多地财政出资扑火
Economic Observer Online: Bad Loans Build Up in Zhejiang
Morning Whistle: Over 600 private enterprises plead government for help