China's Rich Know Bailouts Equal Gold No. 1

Wealthy Chinese investors are lucky -- they know that their losses on bad investments will be covered.1

One of the nice things for wealthy people in China is that mysterious, unidentified third parties occasionally swoop in at the last minute to bail them out of investments that are about to default. And they do such generous things for the good of the country and its financial system, of course.

China's rich are fortunate to have this backstop, too. Just last week the chairman of Industrial & Commercial Bank of China Ltd. was saying the lender wouldn't compensate investors in the 3 billion-yuan ($496 million) Credit Equals Gold No. 1 high-yield trust product that it distributed. "I believe this incident has been a very good opportunity to educate the investors, to educate the trust companies and to educate ICBC," Jiang Jianqing told CNBC while at the World Economic Forum in Davos, Switzerland. In the future, he said, if customers buy "wealth management products or other products they must see clearly the risks."

Teaching them a lesson may have to wait, though, because now it looks like the fund's investors will get some sort of payout, although it isn't clear who will do the paying or how much the payout will be. But minor details like those don't seem to be important right now, because what matters to the Chinese government is preventing the global capital markets from having a panic attack about the country's shadow-banking system.

The trust product, issued in 2011 by China Credit Trust Co. to raise money for a coal company that later collapsed after its owner was arrested, has a payment due Jan. 31. And markets have been getting nervous that a default might trigger a run on similar products. So the expedient thing to do is encourage even more moral hazard and find a way to bail out the fund's investors.

The downside is the part about moral hazard -- that is, encouraging investors to do silly things like plunk money into black holes with implicit guarantees in exchange for annual returns ranging from 9.5 percent to 11 percent. But governments in a crisis, whether in the U.S. or China, tend not to get too worried about stuff like that because they just want to get through the moment. ICBC's vaunted leaders can figure some artful way to explain the flip-flop later, maybe at the next World Economic Forum, where vaporous observations about the state of the world often are more wishful thinking than reality.

Bloomberg News today reported that ICBC said investments in the trust product can be sold to buyers at a price equal to the value of the principal invested, citing an investor who was familiar with an offer by ICBC. Investors looking to sell would have to authorize China Credit Trust to handle the transaction. And isn't that convenient, because the mystery buyer or buyers wouldn't stay a secret for long if just anybody could go directly to the source to get their money back.

For a country run by the Communist Party, China seems to have mastered bailout capitalism pretty quickly.

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