China’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, said two people with knowledge of the matter, signaling government concern about possible defaults.
The China Banking Regulatory Commission also told its local branches to closely monitor risks from trust and wealth-management products, said the people, who asked not to be identified as the matter isn’t public. The commission issues such alerts for matters that it judges may pose significant risks to banks, the people said.
The coal industry has come under scrutiny as investors seek repayment of a 3 billion-yuan ($496 million) trust product that’s facing default because the miner that borrowed the funds collapsed. A default threatens to shake investor faith in China’s $1.67 trillion trust industry and add to challenges to the Communist Party’s ability to ensure stable growth in the world’s second-biggest economy.
The market is “quite worried” about the coal industry, Rainy Yuan, an analyst at Masterlink Securities Corp. in Shanghai, said by phone today. “Coal is a pillar industry in the economy and banks’ exposure to the sector should be quite substantial.” China is the world’s largest producer and consumer of coal.
Shares of Industrial and Commercial Bank of China Ltd. fell 1 percent in Hong Kong to HK$4.76, the lowest closing price in more than six months. China Shenhua Energy Co., the nation’s largest coal miner, declined 1.4 percent as the city’s benchmark Hang Seng Index fell 1.3 percent.
ICBC Chairman Jiang Jianqing told CNBC in an interview from the World Economic Forum in Davos, Switzerland that the bank won’t bail out investors in the Credit Equals Gold No. 1 product that it distribute in 2011. About 20 of those investors met with ICBC officials yesterday in Shanghai demanding their money ahead of the product’s Jan. 31 maturity date.
Standard & Poor’s said in a report today that it doesn’t expect ICBC to bail out investors in the product. Reputational damage from a default would be “well manageable,” it said.
In addition to the coal mining industry, the banking regulator also told regional offices to watch for credit risks associated with changes to China’s economic structure and overcapacity in industries, the people said. The order didn’t mention concerns that the trust product distributed by ICBC may default, they said.
The CBRC’s media office didn’t respond to faxed questions seeking comment today.
Coal prices fell 16 percent last year, according to data tracked by Bloomberg. Prices fell below the break-even point for most small and medium-sized producers, forcing them to reduce output, Helen Lau, an analyst at UOB Kay Hian Ltd. in Hong Kong who covers the coal industry, said by phone.
“As a result of output cuts, they don’t have much cash flow and thus they can’t repay loans and debt,” Lau said. “The fact that the government is giving warnings and not bailing out defaults will be good for industry consolidation, indicating it is letting the market shoulder the burden of its own risks.”
Larger companies have also suffered. Shenhua in October reported an 11.5 percent drop in net income for the first nine months of 2013. China Coal Energy Co., the nation’s second-largest publicly traded coal producer, said today it may report as much as a 65 percent drop in 2013 annual net income.
Analysts at Bank of America Corp. and Deutsche Bank AG are among those to say in the past week that the possibility of defaults in China is increasing as authorities take measures to rein in shadow banking and growth slows. Data this week showed economic growth moderated to 7.7 percent in the fourth quarter from 7.8 percent in the previous three-month period.
Steps taken by China’s central bank to give markets a greater role in setting interest rates have also spurred higher borrowing costs. China’s benchmark seven-day repurchase rate rose to a record 10.77 percent on June 20 and averaged 4.09 percent last year, compared with 3.50 percent in 2012.
The State Council, China’s cabinet, ordered a ban on banks carrying out transactions designed to avoid regulation as part of a campaign to rein in shadow banking, three people familiar with the matter said earlier this month. Moody’s Investors Service estimates the size of lending outside China’s banking sector, know collectively as shadow banking, at $4.8 trillion, or as much as 55 percent of the nation’s 2012 economic output.
— With assistance by Steven Yang, and Dingmin Zhang