Debt industry experts have said that a recent court ruling on a debt dispute between China Merchants Bank and the Hunan Expressway Management Bureau signifies that governments may no longer be the last resort in defaults made by Chinese lenders, Caixin reports.
The country’s highest court, the Supreme People’s Court, has maintained its decision in invalidating the government bureau as debt guarantee on a loan of RMB 455 million ($47 million) taken out 10 years ago by a local private business to the Shenzhen branch of China Merchants Bank.
The court established that the expressway authority did not in fact have the power to make such a guarantee, which has left the bank with losses of over RMB 300 million.
“The Supreme Court ruled the agreement invalid as it believed it to be a form of implicit government guarantee for the loan rather than a legitimate business contract,” said Wang Xiaoming, a lawyer at Beijing Chuting Law Firm.
Zhang Liao, chairman of Shanghai Jumbo Consulting Co. Ltd., said the ruling is a warning that financial institutions should not rely on local government guarantees and should rather focus on their capacities for risk management and business compliance.