Troubled shadow bank product tests no-default policy in China
If the investment fails to pay out, it could shatter assumption of implicit state-backed guarantees
A high-yielding investment product based on a loan to an indebted coal company is offering the latest test of Beijing's willingness to permit defaults in the mainland's shadow banking system.
If the product, which is scheduled to mature on January 31, fails to pay out as promised, it could shatter the widespread assumption that even risky investments carry implicit guarantees from the government and state-owned banks.
Economists say Beijing's zero-tolerance policy towards default has distorted capital allocation, as credit flows to the companies which are most able to call on a bailout if problems arise, rather than those that are most productive.
A situation … does not exist in which ICBC will assume the main responsibility [for the trust product]
Industrial and Commercial Bank of China, the world's largest bank by assets, said yesterday it would not assume the "main responsibility" for repaying investors in a troubled off-balance-sheet investment product that it helped to market.
ICBC's shares have fallen this week amid speculation it would be forced to help repay investors in a 3 billion yuan (HK$3.8 billion) investment product issued by China Credit Trust but marketed through an ICBC branch.
"Regarding this unsubstantiated rumour, a situation completely does not exist in which ICBC will assume the main responsibility [for the trust product]," an ICBC spokesman said.
That leaves unresolved the question of how or whether investors will be repaid.