Industrial & Commercial Bank of China Ltd. is rejecting calls to bail out a troubled 3 billion-yuan ($495 million) trust product, a bank official with knowledge of the matter said, stoking concern that the nation’s first default on such high-yield investments may be looming.
ICBC, which distributed the product sold by a trust company to raise funds for Shanxi Zhenfu Energy Group, won’t assume primary responsibility after the coal miner collapsed, according to the executive, who asked not be identified while negotiations continue. China’s largest bank may be forced to repay investors, most of whom were Beijing-based ICBC’s own private banking clients, Guangzhou Daily reported yesterday.
A default on the investment product, which comes due Jan. 31, may shake investors’ faith in the implicit guarantees offered by trust companies to lure funds from wealthy people. Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September even as policy makers sought to curb money flow outside the formal banking system.
“Nobody wants this default to become a trigger for a financial crisis,” Xue Huiru, a Shanghai-based analyst at SWS Research Co., said of China Credit Trust’s product. “Breaking the implicit guarantee may help the long-term development of China’s financial system, but the short-term pain would be too much for the economy to take.”
The principal amount on the trust product known as Credit Equals Gold No. 1 and issued by China Credit Trust Co. may not be paid back when the debt matures at the end of this month because the closely held coal miner from Shanxi province became insolvent after its owner was arrested in May 2012 for illicitly accepting deposits, Guangzhou Daily said yesterday.
ICBC may need to assume most of the responsibility for bailing out investors because it’s the custodian and distributor, the government-owned newspaper said.
Shares of ICBC, whose Chairman Jiang Jianqing will attend the World Economic Forum in Davos next week, fell 1.2 percent to close at HK$4.88 in Hong Kong trading and dropped 0.6 percent to 3.41 yuan in Shanghai. ICBC doesn’t plan to use its own money to repay the investors, Reuters reported yesterday.
There’s been no progress in the talks between China Credit Trust, Zhenfu Energy and local-government officials on how to compensate investors, China Business News reported today, citing the latest notice to investors.
Executives at Zhenfu Energy couldn’t immediately be reached because the company doesn’t have a listed phone number or website. An official at China Credit Trust who asked not to be identified said information would only be provided to investors.
“The incident exposes the fragility of China’s shadow-banking system, collusive practices between trust companies and banks, and the lack of effective risk control behind many wealth management products,” Jianguang Shen, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, wrote in a note to clients. “The incident also highlights the urgency for more government control.”
Trusts, along with banks’ wealth management products and private lending among individuals, make up China’s $6 trillion shadow-banking system, according to estimates from JPMorgan Chase & Co. in May. That’s 69 percent of the nation’s 2012 gross domestic product.
China’s regulators have been clamping down on shadow banking as they try to slow a record debt buildup that followed the 2008 global financial crisis.
Trusts，the fastest-growing segment of China’s shadow banking industry, typically require people to invest at least 1 million yuan for one to two years.
China Credit Trust, whose largest shareholder is the state-owned People’s Insurance Company (Group) of China Ltd., sold its product with an indicated annual rate of return of 9.5 percent to 11 percent for different tranches of investors, according to a sales document.
The trusts’ higher returns make them an attractive alternative to putting the funds in bank accounts, which offer 3 percent interest on one-year deposits. Unlike other parts of the shadow-banking system, trusts are also supervised by the China Banking Regulatory Commission, which has to approve every product, and most of the issuers are controlled by government-affiliated companies.
Foreign investors such as Barclays Plc, Morgan Stanley and JPMorgan have bought stakes in at least 10 local trust companies in recent years.
Funds raised by the trust companies are mostly lent to developers and local governments or invested in securities and commodities. China’s crackdown in recent years on property-market speculation and banks cutting down on real-estate lending, combined with the benchmark Shanghai Composite Index’s (SHCOMP) 6.8 percent loss last year, has started to put pressure on the trusts.
As of the end of November, 16 trust products faced difficulties in repaying funds, the China Securities Journal reported today, citing data from Chengdu-based Benefit Wealth. Most of their money was invested in real estate projects and securities investments, it said.
The China Credit Trust case “has become the focal point of the trust sector in China, with interested parties wondering if this will become the first case in which investors take a loss,” Zhang Zhiwei, a Hong Kong-based economist at Nomura Holdings Inc., wrote yesterday. A default may lead to “a downturn in sentiment in the trust sector which would have the potential to trigger a ripple effect on the financial system.”
In 2014, more than 2,800 trust products will come due, including 486 real-estate trusts and 20 trusts invested in mining firms, Benefit Wealth data showed.
China’s cabinet imposed new controls on shadow banking with an order that targets off-balance-sheet loans and shores up enforcement of current rules, people familiar with the matter said last week. The directive also bans trusts from pooling deposits from more than one product and investing them in non-tradable assets, the people said.
The People’s Bank of China said today that banks still have strong willingness to expand lending with credit rising fast in January. The central bank will adjust liquidity in the banking system at a “proper” time and pace, it said in a statement.
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