Some investors agree to restructure China Credit Trust product

China Credit Trust says some investors who bought into 3b yuan product have agreed to a debt restructuring, but payment arrangements unclear

China Credit Trust has reached an agreement to restructure a three billion yuan high-yield product to avoid the first default in the mainland's 10 trillion yuan (HK$12.7 trillion) trust industry.

The trust company said yesterday that some investors had agreed to restructure the product. It asked those who had bought trust units to contact their wealth managers at Industrial and Commercial Bank of China, the trust distributor, to arrange for payment.

The statement, released four days before payment was due, did not identify the source of funds, or say whether investors would get their money back.

The three-year product, Credit Equals Gold No1, promised an annual return of about 10 per cent and was bought by 700 high-net-worth investors who were customers of ICBC. It raised money for a Shanxi coal miner that collapsed after its owner was arrested for illegal fundraising. Three companies have been chosen by the trust company, ICBC and Shanxi's provincial government to take over the rights in the coal mine linked to the trust product, the Caixin Media news portal quoted unidentified sources as saying on Sunday.

An investor told the that ICBC had told him that he could sell his trust rights to unidentified buyers at a price equal to the value of the principal invested. "If I sign the agreement, I will get my three million yuan principal back by January 31 when the product matures," said the investor. The wealth manager accompanied me out after [the] talk. I'm undecided about whether to let the 250,000 to 260,000 yuan of interest go or keep negotiating with ICBC for compensation."

Fan Wei, chief analyst at Hongyuan Securities, said the solution would break the "rigid payment" tradition if investors did not receive the promised interest.

"The debt restructuring would set an example for future payments when many trust products mature this year," Fan said.

Many analysts had expected the product would be allowed to default to underscore policymakers' determination to sever the implicit guarantee of such products by financial institutions.

However, the trust company, ICBC and the Shanxi government held talks to avoid a product failure that would have damaged the reputation of the financial institutions and risked sparking social unrest in the province, a trust industry insider said. "It shows Chinese regulators are not ready to completely break rigid repayment," the source said. "The solution would be detrimental to investors' risk awareness."

The Guangzhou-based newspaper reported last week that China Credit Trust, ICBC and the Shanxi government were considering teaming up to bail out investors. ICBC and the provincial government later denied the report.

A bailout of the trust product would leave mainland authorities with a growing problem of moral hazard, Standard & Poor's said in a research note last week. An opportunity for "instilling market discipline" would have been missed, it said.

The trust market represented the biggest default risk in the mainland's shadow banking system, analysts at Bank of America Merrill Lynch said in research report.

This article appeared in the South China Morning Post print edition as: Deal struck to avert trust default