Citic Trust Co., a unit of China’s biggest state-owned investment company, missed a bi-annual payment to investors in one of its products after a steel company didn’t make interest payments on the underlying loan.
A sustained fall in steel prices and losses sustained by Yichang Three Gorges Quantong Coated and Galvanized Plate Co. caused the company to miss 74.6 million yuan ($12 million) in interest payments, according to a statement on Citic Trust’s website Dec. 21. As a result, Citic Trust won’t be able to pay investors the latest installment of the trust product payment that was due Dec. 20, it said.
Trusts, which target people with at least 1 million yuan to invest, have grown to account for more than a quarter of China’s estimated $3.35 trillion in lending outside the banking system, according to an Oct. 16 UBS AG report. More loosely regulated than banks because they don’t hold deposits, trusts have lured investors with promises of high returns, and invest in everything from metals to real estate, as well as make loans.
This case “highlights the fact that even with some of the premier companies that are sponsoring or selling these products, these investments are not full proof,” Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing, said by telephone today. “Now we’re finding there is risk and we will find out who bears it.”
Slowing economic growth in China, which in the third quarter was the weakest since 2009, has curbed demand for steel this year. Baoshan Iron & Steel Co., the nation’s biggest publicly traded steelmaker, in October said its net income for the July-September period fell 4.9 percent from a year ago.
“Steel loans have been considered to be risky since the second quarter of this year,” Wilson Li, a Shenzhen-based analyst at Guotai Junan Securities Co., said by phone.
Yichang raised 1.33 billion yuan in January 2012 via the trust product sold by Citic Trust and used the money to buy raw materials, according to the statement. The underlying loan now faces the risk of default, it said.
A company owned by the local government of the city of Yichang in Hubei province did provide a guarantee for the underlying loan with land use rights that were given a value of 3.1 billion yuan, Citic Trust said. The local government-owned company also invested in the trust product, it said.
Citic Group Corp., parent of the trust company, was established to support former leader Deng Xiaoping’s market reforms in 1979 by Rong Yiren, who later went on to become a vice president of China. Its businesses now span banking to real estate and oil exploration, with the group reporting directly to China’s cabinet.