Rising defaults in China are uncovering hidden corporate debt, and prompting investors to unload in a hurry, reports Bloomberg.
Firms unable to secure loans have turned to other companies to guarantee their credit, which does not appear on the guarantor’s balance sheet. The cross-guarantee model has prompted fears of a domino effect as some borrowers guarantee each other.
“Cross guarantees for unrelated companies could lead to contagion and even systemic risk,” Bloomberg quoted Xia Le of Banco Bilbao as saying. “Since the central bank has started tightening, more hidden cross guarantees may emerge.”