Textile companies that ran short of cash, borrowed too much and expanded too fast are still getting bailouts in Shaoxing.
By Shen Hu, Caijing Magazine 11 November 2008
Authorities in Shaoxing, a Zhejiang Province city in the heart of eastern China’s textile manufacturing region, are busy rescuing teetering textile companies struggling to pay their debts – whether or not they deserve to be saved.
Chen Yueliang, deputy mayor of Shaoxing, said October 20 at a news conference attended by a room full of local bankers that overhauls for the troubled companies “should be accelerated, regardless of cost. The government will be responsible for any problems that emerge in the restructuring progress.”
The announcement came after a series of companies in Shaoxing County, one of China’s wealthiest counties, started reporting financial woes in August 2008.
So far, four leading businesses including Jinxiong Textile Group, Hualian Sunshine Petrochemical Co., Zhejiang Jianglong Holding Group, and Wuhuan Spandex Industry Group have been forced to close. The developments triggered a near panic in the local textile and banking sectors.
Local governments soon responded by offering rescue packages. The county immediately started encouraging banks to provide emergency capital to each of the four companies.
In early October, the provincial government stepped up to the plate. At a news conference, a reshuffling of Hualian Sunshine was announced. Later, the county government ordered banks not to pressure the companies for loan payments.
Although the government intervention has cooled the panic, risks still remain. Banks and other creditors remain uncertain about the companies’ prospects.
Overexpansion
A consensus has been reached among government, bank and enterprise leaders that messy management and inefficient operations were the main reasons for the collapse of Hualian Sunshine and Zhejiang Jianglong.
The director of the Shaoxing Banking Regulatory Department, Luo Youcai, said flawed management and excessive reliance on private financing triggered the crisis. In addition, he faulted companies for adding to their financial risks through overexpansion.
Hualian Sunshine and Zhejiang Jianglong are considered star companies in Shaoxing, astonishing the community with rapid expansions over the past several years.
Hualian Sunshine opened in March 2003 and soon became China’s biggest producer of a textile-making chemical called purified terephthalic acid (PTA). The company was also the first enterprise in the province to post annual sales revenues of more than 10 billion yuan.
Just four months after the business started, Hualian Sunshine invested 2.4 billion yuan in a PTA production project. The goal was a facility with annual capacity of 600,000 tons, making it the largest industrial project in the county. It was expected to boost the local textile industry and encourage other local companies to upgrade facilities.
However, the PTA market has weakened this year in the face of oversupply and increasing production costs. In January, as production capacity reached 1.8 million tons, Hualian Sunshine posted 7.96 billion yuan in sales revenue but lost 960 million yuan.
Indeed, Hualian Sunshine’s PTA facility has lost money since production started in 2005. Nevertheless, the company has accelerated its pace of expansion and took out more loans.
Tight capital chain finally forced the company into bankruptcy in September.
A local bank source told Caijing that one commercial bank’s sudden decision to call back an 80 million yuan loan from Hualian Sunshine was “the straw that broke the camel’s back.”
But a company source blamed Hualian Sunshine capital crunch on the management flaws. According to official data, the company borrowed huge amounts from various banks. A loan from the Industrial and Commercial Bank totalled 2 billion yuan.
Zhejiang Jianglong Group is another major company whose sudden collapse stunned the county. Established in 2003, Zhejiang Jianglong was one of China’s largest private garment companies, with annual sales revenues of about 600 million yuan.
Zhejiang Jianglong has eight subsidiaries involved in textile, dyeing, technology and trade. The company reported total assets of 2.2 billion yuan and more than 4,000 employees. It once announced an ambitious goal to list on the NASDAQ exchange this October.
However, a former company employee told Caijing that behind the scene of prosperity, Zhejiang Jianglong has faced capital pressure since late last year. The company even owed a large sum in employee wages.
In early October, the company closed. President and founder Tao Shoulong vanished, leaving behind unpaid salaries and debt.
A Zhejiang Jianglong supplier told Caijing that the company’s “collapse is mainly due to its reliance on private loans with high interest rates.” According to Shaoxing government statistics, the company has 2.22 billion yuan in liabilities, including 1.3 billion yuan in bank loans and 587 million yuan owed to private lenders.
Cumbersome Financing
Weak management and an awkward financial web that links the region’s enterprises have been cited as reasons for the threat of widespread defaults that could devastate the regional textile sector.
An industry insider estimated that the risks of the four companies that recently closed may affect 80 percent of the local enterprises in Shaoxing.
A complicated web of mutual financial assurance has long existed in Zhejiang. The troubled companies were found to have total liabilities of 14.6 billion yuan, including 11.3 billion yuan in bank loans, of which 6.9 billion yuan is guaranteed by 33 other companies.
A local bank source told Caijing “a mutual financial assurance web has been formed in Shaoxing. Companies easily offer assurance to their business partners or friends. It is not only happen in Shaoxing, but the entire region of Jiangsu and Zhejiang. And banks have no way to deal with the issue.”
Because of the incomplete credit information system, banks now cannot properly trace details of the messy mutual assurance relations among enterprises. Moreover, some guarantee companies are unqualified to offer assurance. A bank source told Caijing the mutual assurance practice is very risky and, if there are any problems, a large number of companies will be affected.
Over the past several years, the rapid growth of local companies has incited banks to expand lending to further fuel company expansions. “Banks competed to offer loans to large enterprises such as Hualian Sunshine and lowered their loan requirements,” said a source from the local banking industry.
The local government also has encouraged enterprises to expand capacities without considering whether such expansions would result in oversupply or even whether the companies are competitive.
Government Bailout
Since the beginning of this year, Shaoxing’s export-driven economy has been hurt by the global financial turmoil as well as the appreciation of the yuan.
According to an official report, “most enterprises in Shaoxing have a tiny profit margin or merely break even. Some companies started cutting employment, while several large textile and dyeing companies reported bankruptcies or had forced to restructure.”
Local authorities got involved in August when they started supervising enterprise restructurings and persuaded banks to go easy on troubled debtors. The government also reportedly offered policy support to distressed companies.
Feng Jianrong, vice governor of Shaoxing County, said the local financial budget is expected to reach 20 billion yuan this year. “With 20 billion yuan, we will be able to adjust the local economy,” he said.
However, a banking source told Caijing that the expectations of local officials would be difficult for banks to meet. In fact, although some banks followed the local government’s requirement by not calling back loans from companies at risk, they have increased the pressure on company guarantees.
Some industry insiders worry government intervention will increase moral hazard. They think companies should be responsible for their own operations, and that government rescues may upset market competition.
Nevertheless, government intervention has relieved enterprises of some pressure. Hualian Sunshine resumed operations in November after receiving a 1.5 billion yuan capital injection from two other companies.
In addition to the Hualian Sunshine bailout, a restructuring plan for Zhejiang Jianglong has been finalized. But plans for saving Jinxiong Textile and Wuhuan Spandex are still in the works.
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Fast-Track Rescues for Shaoxing’s Failures
Textile companies that ran short of cash, borrowed too much and expanded too fast are still getting bailouts in Shaoxing.
By Shen Hu, Caijing Magazine
11 November 2008
Authorities in Shaoxing, a Zhejiang Province city in the heart of eastern China’s textile manufacturing region, are busy rescuing teetering textile companies struggling to pay their debts – whether or not they deserve to be saved.
Chen Yueliang, deputy mayor of Shaoxing, said October 20 at a news conference attended by a room full of local bankers that overhauls for the troubled companies “should be accelerated, regardless of cost. The government will be responsible for any problems that emerge in the restructuring progress.”
The announcement came after a series of companies in Shaoxing County, one of China’s wealthiest counties, started reporting financial woes in August 2008.
So far, four leading businesses including Jinxiong Textile Group, Hualian Sunshine Petrochemical Co., Zhejiang Jianglong Holding Group, and Wuhuan Spandex Industry Group have been forced to close. The developments triggered a near panic in the local textile and banking sectors.
Local governments soon responded by offering rescue packages. The county immediately started encouraging banks to provide emergency capital to each of the four companies.
In early October, the provincial government stepped up to the plate. At a news conference, a reshuffling of Hualian Sunshine was announced. Later, the county government ordered banks not to pressure the companies for loan payments.
Although the government intervention has cooled the panic, risks still remain. Banks and other creditors remain uncertain about the companies’ prospects.
Overexpansion
A consensus has been reached among government, bank and enterprise leaders that messy management and inefficient operations were the main reasons for the collapse of Hualian Sunshine and Zhejiang Jianglong.
The director of the Shaoxing Banking Regulatory Department, Luo Youcai, said flawed management and excessive reliance on private financing triggered the crisis. In addition, he faulted companies for adding to their financial risks through overexpansion.
Hualian Sunshine and Zhejiang Jianglong are considered star companies in Shaoxing, astonishing the community with rapid expansions over the past several years.
Hualian Sunshine opened in March 2003 and soon became China’s biggest producer of a textile-making chemical called purified terephthalic acid (PTA). The company was also the first enterprise in the province to post annual sales revenues of more than 10 billion yuan.
Just four months after the business started, Hualian Sunshine invested 2.4 billion yuan in a PTA production project. The goal was a facility with annual capacity of 600,000 tons, making it the largest industrial project in the county. It was expected to boost the local textile industry and encourage other local companies to upgrade facilities.
However, the PTA market has weakened this year in the face of oversupply and increasing production costs. In January, as production capacity reached 1.8 million tons, Hualian Sunshine posted 7.96 billion yuan in sales revenue but lost 960 million yuan.
Indeed, Hualian Sunshine’s PTA facility has lost money since production started in 2005. Nevertheless, the company has accelerated its pace of expansion and took out more loans.
Tight capital chain finally forced the company into bankruptcy in September.
A local bank source told Caijing that one commercial bank’s sudden decision to call back an 80 million yuan loan from Hualian Sunshine was “the straw that broke the camel’s back.”
But a company source blamed Hualian Sunshine capital crunch on the management flaws. According to official data, the company borrowed huge amounts from various banks. A loan from the Industrial and Commercial Bank totalled 2 billion yuan.
Zhejiang Jianglong Group is another major company whose sudden collapse stunned the county. Established in 2003, Zhejiang Jianglong was one of China’s largest private garment companies, with annual sales revenues of about 600 million yuan.
Zhejiang Jianglong has eight subsidiaries involved in textile, dyeing, technology and trade. The company reported total assets of 2.2 billion yuan and more than 4,000 employees. It once announced an ambitious goal to list on the NASDAQ exchange this October.
However, a former company employee told Caijing that behind the scene of prosperity, Zhejiang Jianglong has faced capital pressure since late last year. The company even owed a large sum in employee wages.
In early October, the company closed. President and founder Tao Shoulong vanished, leaving behind unpaid salaries and debt.
A Zhejiang Jianglong supplier told Caijing that the company’s “collapse is mainly due to its reliance on private loans with high interest rates.” According to Shaoxing government statistics, the company has 2.22 billion yuan in liabilities, including 1.3 billion yuan in bank loans and 587 million yuan owed to private lenders.
Cumbersome Financing
Weak management and an awkward financial web that links the region’s enterprises have been cited as reasons for the threat of widespread defaults that could devastate the regional textile sector.
An industry insider estimated that the risks of the four companies that recently closed may affect 80 percent of the local enterprises in Shaoxing.
A complicated web of mutual financial assurance has long existed in Zhejiang. The troubled companies were found to have total liabilities of 14.6 billion yuan, including 11.3 billion yuan in bank loans, of which 6.9 billion yuan is guaranteed by 33 other companies.
A local bank source told Caijing “a mutual financial assurance web has been formed in Shaoxing. Companies easily offer assurance to their business partners or friends. It is not only happen in Shaoxing, but the entire region of Jiangsu and Zhejiang. And banks have no way to deal with the issue.”
Because of the incomplete credit information system, banks now cannot properly trace details of the messy mutual assurance relations among enterprises. Moreover, some guarantee companies are unqualified to offer assurance. A bank source told Caijing the mutual assurance practice is very risky and, if there are any problems, a large number of companies will be affected.
Over the past several years, the rapid growth of local companies has incited banks to expand lending to further fuel company expansions. “Banks competed to offer loans to large enterprises such as Hualian Sunshine and lowered their loan requirements,” said a source from the local banking industry.
The local government also has encouraged enterprises to expand capacities without considering whether such expansions would result in oversupply or even whether the companies are competitive.
Government Bailout
Since the beginning of this year, Shaoxing’s export-driven economy has been hurt by the global financial turmoil as well as the appreciation of the yuan.
According to an official report, “most enterprises in Shaoxing have a tiny profit margin or merely break even. Some companies started cutting employment, while several large textile and dyeing companies reported bankruptcies or had forced to restructure.”
Local authorities got involved in August when they started supervising enterprise restructurings and persuaded banks to go easy on troubled debtors. The government also reportedly offered policy support to distressed companies.
Feng Jianrong, vice governor of Shaoxing County, said the local financial budget is expected to reach 20 billion yuan this year. “With 20 billion yuan, we will be able to adjust the local economy,” he said.
However, a banking source told Caijing that the expectations of local officials would be difficult for banks to meet. In fact, although some banks followed the local government’s requirement by not calling back loans from companies at risk, they have increased the pressure on company guarantees.
Some industry insiders worry government intervention will increase moral hazard. They think companies should be responsible for their own operations, and that government rescues may upset market competition.
Nevertheless, government intervention has relieved enterprises of some pressure. Hualian Sunshine resumed operations in November after receiving a 1.5 billion yuan capital injection from two other companies.
In addition to the Hualian Sunshine bailout, a restructuring plan for Zhejiang Jianglong has been finalized. But plans for saving Jinxiong Textile and Wuhuan Spandex are still in the works.
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