A last minute bailout will see the 700 investors in a 3 billion-yuan wealth management product (WMP) called Credit equals Gold No. 1 recouping their full principal minus some interest averting an emerging crisis in China’s troubled shadow banking system – for now.
The product, issued by one of China’s largest “shadow” banks – China Credit Trust Co, was widely expected to default on the 31st January 2014 after the marketer, Industrial and Commercial Bank of China (ICBC) said it had no plans to use its own money to repay investors. The product, promising 10 per cent yields consisted solely of bad loans to and equity in coal miner Shanxi Zhenfu Energy Group who collapsed in 2012 and has ceased production.
“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. “delaying the first default means risks are snowballing,” he said.
Tight secrecy surrounds the details of the mysterious saviour, but the Financial Times reports on China media’s belief that the bailout involved ICBC, China Credit Trust Co and the government.
It is estimated roughly 4 trillion yuan of trusts will mature this year, with many expected to have repayment problems.
» GFC2 – Will it be made in China? (Wealth Management Products) – Who Crashed The Economy, 30th June 2013.
» ICBC Offers Clients Option to Recoup Funds From Trust – Bloomberg, 28th January 2014.