ICBC bailout of trust product unlikely

A default may spook the financial system since a large number of trust products mature this year

PUBLISHED : Saturday, 25 January, 2014, 5:29am
UPDATED : Monday, 27 January, 2014, 3:06pm

Beijing appears to be shoring up its resolve to resist pressure for a bailout of a 3 billion yuan (HK$3.8 billion) trust product that is seen as a test of the willingness of authorities to push ahead with moves to reduce risks in the financial system caused by spiralling debt.

Industrial and Commercial Bank of China has been holding firm against calls to compensate about 700 investors who bought the three-year trust product at its branches in Shanxi. The product, which raised funds for a coal miner in the province, was issued by China Credit Trust and distributed by the lender.

ICBC chairman Jiang Jianqing said the lender would not "rigidly" pay back investors, CNBC reported on its website yesterday. The incident would serve as a lesson for investors on moral hazards and the risks associated with such investments, Jiang told CNBC from the World Economic Forum in Davos, Switzerland.

The chairman's comments followed those by an official at ICBC's Shanghai branch on Thursday that had provided encouragement to the trust's investors. "ICBC won't ignore the issue of its reputation," the official Shanghai Securities News quoted the official as telling some of these investors. The bank would take some responsibility over the matter, the official was quoted as saying.

However, Jiang's reported comments at Davos suggest that an outright bailout of the trust is slipping further away, even if his use of the term "rigidly" lends support to speculation that investors may yet receive some form of aid.

A banker said ICBC might pay some compensation in "a less obvious" way, rather than repaying directly, to avoid being held responsible for more possible defaults in the future. The Shanxi government denied it would bear 50 per cent of the responsibility, according to a report on its website on Thursday. It urged the involved parties to solve the problem "by market means".

The statement was a rebuttal to a report in Guangzhou-based Time Weekly newspaper that ICBC and China Credit may join the Shanxi government in a bailout, with ICBC and China Credit Trust each taking responsibility for 25 per cent of payments for the trust and the Shanxi government covering the rest, citing an unidentified source.

Any default of the trust product - which matures on Friday - raises the spectre of a wave of similar defaults with implications for the stability of the financial system.

"Once a default takes place, it will set the precedent about who bears the losses when a large amount of trust products will mature this year," Goldman Sachs analysts said in a research report.

The product, Credit Equals Gold No 1, which had offered an annual return of 10 per cent, raised money for a coal miner that collapsed after its owner was arrested.

The China Banking Regulatory Commission has ordered its regional offices to increase scrutiny of credit risks in the coal industry, Bloomberg reported yesterday, citing two sources.

ICBC declined to comment and the trust company was unavailable for comment yesterday.

Liao Qiang, an analyst at Standard and Poor's, said he did not expect ICBC to commit to a bailout as the bank has "no legal ground to make such a move". "Chinese banks are unlikely to bail out high-yield wealth management products unless the banks happen to be the originator of the products," Liao said.

A source at a Shanghai-based trust firm said ICBC may be the originator. A research report from Beijing-based brokerage China Securities said ICBC charged 4 per cent as an intermediary fee for selling the product, while China Credit Trust charged 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.

The Goldman Sachs analysts said that if the trust product's investors bear the losses, they will withdraw money from the shadow banking system.