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  • Apr 21, 2014
  • Updated: 9:13pm
BusinessBanking & Finance

China trust product's fate hangs in balance amid talk of bailout

Speculation mounts that investors may be bailed out, with 3b yuan product set to mature in days

PUBLISHED : Friday, 24 January, 2014, 2:19am
UPDATED : Friday, 24 January, 2014, 2:19am

The fate of a three billion yuan (HK$3.81 billion) trust product that was expected to become the first trust default of the year hangs in the balance, with talk of the local government and the product's backers moving to avert a default.

China Credit Trust and the product's distributor, Industrial and Commercial Bank of China (ICBC), may bail out investors in the troubled trust together with Shanxi provincial government, the Guangzhou-based Time Weekly newspaper reported yesterday.

When the three-year trust product matures on January 31, ICBC and China Credit Trust may each take responsibility for 25 per cent of payments for the trust, an unidentified source was quoted by the newspaper as saying.

Policymakers do not want to see any financial turbulence or social unrest

The product, Credit Equals Gold No1, raised money for a coal mining firm that collapsed after its owner was arrested.

The Shanxi government, where the company was based, may take responsibility for the remaining 50 per cent, the newspaper said. ICBC declined to comment and the trust firm was not available for comment yesterday.

"The whole thing has become tricky," an analyst at a Beijing-based brokerage said, adding that the securities firm has banned its analysts from openly talking about the issue.

"I thought China would allow the trust to default. However, as regulators and the local government step in, it seems policymakers do not want to see any financial turbulence or social unrest."

The trust investors yesterday met ICBC officials at a private-banking branch in Shanghai, demanding their money back.

Investors were asked to put in at least three million yuan in the trust product with a guarantee that it was "100 per cent safe", said Fang Ping, one of the 20 investors who met ICBC officials.

A source at a Shanghai-based trust firm said that ICBC may be held responsible for the current problems.

A research report from Beijing-based brokerage China Securities said ICBC charges 4 per cent as an intermediary fee for selling the product, while China Credit Trust charges 0.2 per cent.

"The high income ICBC made from the deal and the large size of the trust product suggest ICBC may be the one which initiated the high-risk product," the source said.

An executive with ICBC said last week the bank would not bail out the product. However, as more shadow banking products are set to default this year, regulators are increasingly concerned about its social impact, a source close to the China Banking Regulatory Commission said.

"Banks are directly or indirectly involved in shadow banking," the source said. "In some cases, they sell highly risky trust products to investors without sufficient risk disclosure. It is time to teach them a lesson."

The Shanxi government is getting involved probably under "political pressure", the source added.

The spotlight on the Shanxi Zhenfu-linked trust comes as concerns mount over similar products tied to other miners in the coal-rich province. Liansheng may default on its 384 million yuan trust product issued in November 2012, China Daily reported last month. Xin Bei Fang said it was unable to pay the expected yield of its 1.3 billion yuan trust product this month, reported Shanghai Securities News.

A banker said ICBC may pay some compensation in "a less obvious" way, rather than repaying directly.

China Credit said on Wednesday that a project backed by the product has obtained a new mining licence.

A default would shake investors' faith in the implicit guarantees offered by trust firms to draw funds from wealthy investors.



This article is now closed to comments

A common con tactic is promising huge, mega-outsized returns.
This tactic simply appeals to our greed.
Fact is, no one can legally guarantee you anything.
US Treasurys are guaranteed inasmuch as the principal and interest payments are backed by the full faith and credit of the US government.
If you buy a Treasury and hold to maturity, the US government promises you'll get your principal back with interest paid on time.
Any investment guarantee from anyone other than the US government (and our Hong Kong government, hopefully) should be considered a scam.
Not only the Chinese investors but every investor in the world should beware of this too-good-to-be-true Ponzi tactic.
(Adapted from Ken Fisher)
By bailing them out, Beijing risks long-term pain for short-term gain.
The default of trust products could trigger some short-term negative impacts on China's financial sector and the reputation of financial institutions, but it is positive for the healthy development of financial system in the long run, by
(i) reducing the implicit guarantee of financial institutions for investment products, and
(ii) increasing the risk awareness of both investors and financial instituutions.
The no-free-lunch postulate cannot be easily refuted.
If you’re not paying for it, someone else somewhere are paying for you, now or in the future.
For this three billion yuan (HK$3.81 billion) trust product,
either it’s paid by the trust-product buyers (those wealthy Chinese investors),
or ICBC (their shareholders),
or the Shanxi local government (the Chinese taxpayers),
or China Credit Trust (their shareholders),
or a combination of the above.
Debt without default is like Capitalism without bankruptcy, or Christianity without hell
--- a very bad signal sent to the carefree Chinese (wealthy) investors.


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