China Credit Trust begins repaying trust investors after rescue

PUBLISHED : Thursday, 30 January, 2014, 5:01am
UPDATED : Thursday, 30 January, 2014, 5:01am

China Credit Trust 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 yesterday to transfer their rights in the 3 billion yuan (HK$3.81 billion) trust to unidentified buyers in exchange for an amount equal to the product's face value, said Chang Feng, a spokesman for an investor group, and Du Ronghai, another investor.

Investors were given until 5pm 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 stresses will mount in the US$1.7 trillion trust industry, the fastest-growing segment of the shadow-banking system. The rescue also spurred warnings that investors are being shielded from risks.

"This is surely not a good outcome from a macroeconomic perspective," said Yao Wei, a Hong Kong-based economist at Societe Generale. "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 No1, with an indicated annual rate of return of 9.5 to 11 per cent for different tranches, according to sales documents posted on the company's website. The product, due tomorrow, was structured to raise funds from wealthy investors for a coal miner, which then collapsed in 2012.

Last week in Davos, Switzerland, former People's Bank of China adviser Li Daokui said China needed to let investors in a troubled trust product suffer losses to demonstrate the real risks of the investments.

Trust products were "arguably the second most risky financing channel for corporates" after underground financing, Zhang Zhiwei, the chief China economist at Nomura, said in a note to clients on Tuesday.

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," he wrote.

A unit of state-backed Citic Group might take part in the bailout, the Oriental Morning Post reported. The offer to investors was presented on January 27 by Industrial and Commercial Bank of China, which distributed the trust product to more than 700 private banking clients in 2011.