A chemical maker in the eastern province of Shandong had trading of its bonds suspended amid uncertainty over its operating performance. That triggered a slump in the dollar bonds of a neighbouring company that had guaranteed the other’s debt.
China’s privately held firms have relied on extending such guarantees for each other to entice banks, which otherwise prefer lending to state-owned firms, to offer them loans. It’s not the first time that the practice has had a domino effect. In March, concerns about such intertwined obligations, which are excluded from balance sheets, in the same province of Shandong caused a selloff of the region’s local corporate notes.