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SHANGHAI (Reuters) - China's banking regulator has asked lenders to look into the guarantee chains of its borrowers, according to a document seen by Reuters, the latest in a slew of policy initiatives to reduce the risk of defaults snowballing through the financial system.
In a document circulated on April 13, the China Banking Regulatory Commission (CBRC) asked lenders to look into the risk associated with guarantee chains and develop appropriate methods to deal with borrowers who are at risk.
China's banks have found some guarantees for loans ineffective because the guarantor is in a chain of borrowers who have all guaranteed each other's liabilities, leading the default of one to impact the rest of the chain.
"The CBRC asked us to hand over the debt and guarantor details for all our Shandong borrowers," said a banker at a foreign lender in Shanghai.
The CBRC has asked lenders specifically to probe their borrowers in the eastern province of Shandong and northeastern province of Liaoning, according to the document.
The news was first reported by financial publication Caixin.
Moody's Investors Service warned in a recent report that Chinese banks are facing increasing risks because of rising leverage in the system and financial sector interconnectedness, not just between the formal banking system but also with the shadow banking system.
Liaoning firm China Huishan Dairy Holdings Co Ltd (6863.HK), which saw $4 billion wiped off its shares in a single day in March, said it had missed loan repayments and lost contact with a key executive in charge of its finances after local media reported that 3 billion yuan ($436.05 million) had been misappropriated.
Reporting by Li Zheng and Engen Tham in Shanghai; Editing by Jacqueline Wong