Hefei Xingtai Financial Holding Group: Risk Management

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On May 8, 2012, the president of Hefei Xingtai Financial Holding Group (Xingtai) received a message from a senior officer of the Hefei Municipal Government, the company's authorizing body, asking that Xingtai provide financial support to PanTeng Company (PanTeng), a solar power manufacturing company. In order to survive, PanTeng needed Xingtai to provide a guarantee for a ¥100 million business loan from a commercial bank. PanTeng had already been turned down by Xingtai Financing Guaranty, one of Xingtai's subsidiaries, because of the potentially high level of guarantee risk. If Xingtai provided a guarantee, it could be liable to reimburse the loan due to PanTeng's high-risk operation, lose its risk management expertise, and face further violations. However, denying the senior officer's request would hamper Xingtai's important relationship with the local government. Should Xingtai take a chance and approve the loan, or should it deny the guarantee?
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