China Credit Trust Co. started repaying investors in a high-yield product whose threatened failure spurred concern of further defaults and contributed to a sell-off in emerging-market stocks and currencies.
Most clients in Shanghai, Guangzhou and Beijing signed an agreement on Jan. 28 to transfer their rights in the 3-billion-yuan ($496 million) trust to unidentified buyers in exchange for an amount equal to the product’s face value, Chang Feng, a spokesman for an investor group, and Du Ronghai, another investor, told Bloomberg by phone. Investors were given until 5 p.m. yesterday to accept the offer.
The bailout offer averted what would have been China’s biggest trust default in at least a decade and eased concern that financial stresses will mount in the $1.7 trillion trust industry, the fastest-growing segment of the shadow-banking system. At the same time, the bail-out spurred warnings that investors are being shielded from the risks in the trust market.
“This is surely not a good outcome from a macroeconomic perspective,” said Yao Wei, a Hong Kong-based China economist at Societe Generale SA. “If a financial market doesn’t even allow defaults, how can there be real market-based interest rates?”
China Credit Trust in February 2011 sold the product, called Credit Equals Gold No. 1, with an indicated annual rate of return of 9.5 percent to 11 percent for different tranches, according to sales documents posted on the company’s website. The product, due Jan. 31, was structured to raise funds from wealthy investors for a coal miner, which then collapsed in 2012.
In an interview last week in Davos, Switzerland, former People’s Bank of China adviser Li Daokui echoed Yao’s remarks and said China needs to let investors in a troubled trust products suffer losses to demonstrate the real risks of the investments.
Trust products are “arguably the second most risky financing channel for corporates” after underground financing, Zhang Zhiwei, chief China economist at Nomura Holdings Inc., said in a note to clients on Jan. 28. Zhang said Nomura had identified 28 “similar credit-risk events” since 2012 involving trust products.
“Yet there has so far been no actual default where investors have had to swallow those losses,” Zhang wrote.
A unit of Citic Group Corp., a Chinese state-backed conglomerate, may participate in the bailout, Oriental Morning Post reported on Jan. 28, with providing more details. The offer to investors was presented on Jan. 27 by Industrial & Commercial Bank of China Ltd., which distributed the trust product to more than 700 private banking clients in 2011.
An investigation should be opened to determine if the lender met its responsibilities as agent, according to a commentary today in the Communist Party-run People’s Daily newspaper. The trust should also be probed to see if there was due diligence, kickbacks, overly high commissions or explanation of investment risk, the commentary said. It was written by Liu Xianyun, who wasn’t identified.
Zhang of Nomura told clients in his note that he estimates 3.5 trillion yuan of trust products will mature this year.
“We believe more trust products could come under distress this year as the economy slows,” Standard & Poor’s credit analyst Liao Qiang wrote in an e-mailed report yesterday. “In our view, the underlying risks to the assets of wealth management products and trust loans have yet to be alleviated.”
The economy slowed to 7.7 percent in 2013 and is forecast to expand 7.5 percent this year, according to an analyst survey, the slowest pace since 1990.
Under the agreement, China Credit Trust will handle the transaction on behalf of investors and transfer payment to investors’ accounts. Calls to Wang Zhenning, Beijing-based press officer of ICBC, and China Credit Trust board secretary Wei Qing went unanswered yesterday.
Investors will continue efforts to receive unpaid interest for 2013, said Du, a Shenzhen-based investor who put 3 million yuan into the product. Du said he was owed about 220,000 yuan in interest payments.
“We believe there will be defaults this year, with trusts being the most risky sector, but it will be a controlled experiment,” Societe Generale’s Yao said.