The China Securities Regulatory Commission (CSRC) has issued Hainan Airlines a warning about the level of guarantees it provided to subsidiaries in 2018.

In a stock exchange disclosure, the company said it received a letter from the CSRC Hainan Branch on 25 July, pinpointing CNY5.67 billion ($823 million) in guarantees to HNA Group, and CNY900 million to HNA Industry.

The amounts were disclosed in Hainan’s 2018 annual report, and were recently repaid, but exceeded the Commission’s limit of 50% of the company’s net assets. It was also criticised for not making timely disclosures about the guarantees to the two companies.

By issuing a warning letter, the Commission requested Hainan strictly abide by the securities laws and prevent such incidents from happening again.

The company can appeal the CSRC’s decision within 60 days, or the Commission can escalate the matter to the Supreme People’s Court within six months. Its current judgement will remain during the appeal and litigation period.

The issue of non-compliant guarantees is rampant among China’s listed companies, according to a January report by Xinhua.

At 30 June 2018, the total amount of external guarantees provided by companies listed on Chinese stock exchanges was at a historic high of over CNY4.7 trillion, while nearly 300 companies busted the net assets limit.

Under a 2003 version of a circular on external guarantees by listed companies, these limits had to be strictly adhered to. The commission softened its stance in 2005, requiring companies to submit those activities for shareholder consideration and board review once the limits are crossed.

In 2018, many of the violations were reflective of liquidity issues, the report said. In cases with complex counter-guarantee structures, subsidiaries tend to be greatly impacted once the parent company encounters issues.

Source: Cirium Dashboard