China Credit Trust Co. said it reached an agreement to restructure a high-yield product that sparked concern over the health of the nation’s $1.67 trillion trust industry and contributed to a global selloff in emerging-market assets.
The agreement includes a potential investment in the 3 billion-yuan ($496 million) product, Beijing-based China Credit Trust said on its website today, four days before payment is due. The two-line statement didn’t identify the source of funds, or say whether investors would get their money back.
The threat of a default looms over the fastest-growing part of China’s shadow-banking system, adding to challenges to the Communist Party’s ability to ensure stable growth in the world’s second-biggest economy. The Credit Equals Gold product, distributed by Industrial & Commercial Bank of China Ltd., was structured to raise funds from wealthy investors for a coal miner that collapsed in 2012.
“The problem was properly handled,” Yang Feng, a Beijing-based analyst at Citic Securities Co., China’s largest brokerage, said by telephone today. “It indicates the government still won’t tolerate any ultimate default and retail investors will continue to be compensated in similar cases.”
Credit Equals Gold was used to raise funds for Shanxi Zhenfu Energy Group, which collapsed after its owner Wang Pingyan was arrested in 2012 for illegally collecting deposits. The trust’s investors, who were ICBC’s own wealthy clients, met with bank officials in Shanghai last week to demand their money.
Assets managed by China’s 67 trust companies soared 60 percent to $1.67 trillion in the 12 months ended September, according to the China Trustee Association, even as policy makers sought to curb money flows outside the formal banking system. China’s shadow banking industry, which includes wealth management products issued by banks, has expanded to $5.95 trillion, JPMorgan Chase & Co. estimated in May.
A bailout of the trust product would leave Chinese authorities with a growing problem of moral hazard and other potential problems in the system, Standard & Poor’s said in a Jan. 24 statement. An opportunity for “instilling market discipline” will have been missed, it said.
China Credit Trust in February 2011 issued Credit Equals Gold with an indicated annual rate of return of 9.5 percent to 11 percent for different tranches of investors, according to sales documents posted on the trust company’s website.
The proceeds were meant to buy equity stakes in Zhenfu Energy to help fund the acquisition of four coal mines, upgrade equipment and set up factories, the documents show. Wang Pingyan owned about 90 percent of Zhenfu Energy at that time, while his father Wang Yusuo held 10 percent. The two sold a 49 percent stake to the trust product while putting up the remaining holding as collateral, the documents show.
“Looks like everyone is off the hook here,” Gavin Parry, managing director of brokerage Parry International Trading Ltd. in Hong Kong, said in an e-mail. “We also avert a bullet for the money markets, as rates were sure to spike on a default.”