Monitor | By avoiding a small crisis now China risks a big one in future
With the trust product bailout, Beijing gives the green light to expansion of the shadow financial system instead of acting to let market price risk
Yesterday the 700 investors in China's "Credit Equals Gold No 1 Trust" were able to breathe a collective sigh of relief after their stricken shadow market investment scheme got bailed out.
The rest of us should be very nervous indeed.
No one quite knows who has stumped up the three billion yuan (HK$3.8 billion) needed to repay investors their principal and avoid a default. Market participants point the finger at various suspects: ICBC, which sold the Credit Equals Gold notes to its customers; Huarong Asset Management, the traditional store house for ICBC's bad assets; state insurance giant PICC, which owns a third of the trust company that structured the product; and the provincial government of Shanxi, the original backer of the failed coal company that borrowed the money in the first place.
It could be none, any, or all of them. But whichever it is, no one can doubt that China's authorities have decided to cobble together a rescue rather than risk a default. It is questionable whether the bailout really helped China to avert a "Lehman moment", as some analysts are claiming.
Sure, if the Credit Equals Gold trust had been allowed to default it would have badly damaged investor confidence in other trust products. Savers would have stampeded back into low-yielding banks deposits, which would have made it difficult for China's trust companies to sell enough new products to pay out the investors in their maturing short-term notes.
In turn, that could have triggered a nasty shake-out in China's shadow financial system. There would have been a major re-pricing of credit risk. Other trust products would have defaulted, and some weak borrowers would have gone to the wall.