BEIJING, Jan 28 ― China’s eleventh-hour rescue of wealthy investors in a high-yield trust threatens to drive more money into the nation’s US$6 trillion (RM20 trillion) shadow-banking industry, undermining regulators’ efforts to deter excessive risk-taking.
Industrial & Commercial Bank of China Ltd., the nation’s largest lender, yesterday told customers who had invested in the 3 billion-yuan trust product that they can sell their rights to unidentified buyers to recoup the principal. Some clients plan to visit ICBC branches ahead of tomorrow’s 5pm deadline for accepting the offer to demand more interest, according to Du Ronghai, a Guangzhou-based investor.
Averting the nation’s biggest trust default may reinforce investors’ belief in implicit guarantees and the government’s backing of such risky products, stoking their appetite for products in the US$1.67 trillion trust market. The bailout underscores the pressure on authorities to maintain financial and social stability even as they aim to prune the government’s role in the world’s second-largest economy and curtail debt.
“The rescue brings short-term relief to the market at the cost of brewing a long-term crisis,” said Zhang Jian, a Beijing-based strategist at BOC International Holdings Ltd. “It aggravates the moral-hazard problem and makes it almost risk- free for investors to pump money into trusts, wealth management products and other shadow-banking sectors.”
Potential investment
China Credit Trust Co., the Beijing-based firm that raised money through the Credit Equals Gold No. 1 trust in 2011 for a failed coal miner, reached the accord four days before the product matured. In a two-sentence statement, it told the trust’s investors that it had reached a pact for a potential investment and asked them to contact financial advisers at ICBC for more details. It didn’t disclose the source of the funds.
Two calls to Li Jie, a manager of the product at China Credit Trust, weren’t immediately returned today.
Under the rescue plan, investors in the trust product must authorise China Credit Trust to handle the transaction if they want to recoup their principal, according to one investor who cited the offer presented by ICBC and asked to be identified only by his surname Chen.
Investors plan to visit ICBC branches in Guangzhou, Shanghai and Beijing today to demand more interest, according to Du, who has put 3 million yuan into the product. ICBC’s Beijing-based press officer, Wang Zhenning, declined to comment.
The Credit Equals Gold high-yield product, distributed by Beijing-based ICBC to its private-banking clients, was structured to raise funds for Shanxi Zhenfu Energy Group. The coal miner collapsed in 2012 after its owner Wang Pingyan was arrested for illegally collecting deposits.
Missed target
China Credit Trust made three interest payments since 2011 totaling 670.9 million yuan to investors in Credit Equals Gold, with the last installment in December missing the anticipated rate of return, according to a January 16 statement that was posted on the trust company’s website.
Investors met with ICBC officials at a private-banking branch in Shanghai last week, demanding their money back and threatening to escalate the matter with bank, government and regulators in Beijing if the case wasn’t settled by January 31. They had been given guarantees that it was “100 per cent safe,” said Fang Ping, one of 20 investors present at that time.
With the help of such implicit guarantees, trusts have overtaken insurance to become China’s biggest financial segment after banks. Their assets under management surged fourfold from the beginning of 2010 to more than 10 trillion yuan as of September 30, data from the China Trustee Association showed, even as policy makers sought to curb money flows outside the formal banking system.
“By bailing out investors in the product, China is successfully kicking the can down the road,” Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein HK Ltd., wrote in a note today. “Investors in these shadow banking products, despite taking significant risks, appear immune to losses as last-minute solutions, often government-backed, usually emerge.” ― Bloomberg
