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China's 'shadow banking' system in trouble as default looms

January 26, 2014


Beijing : A shockwave is looming in China's multi-trillion dollar 'shadow banking' system, with an unprecedented default only days away on a $500 million investment product sold to hundreds of people. Staff at China's biggest bank ICBC pushed the 'Credit Equals Gold #1 Trust Product' by promising returns of 10 per cent a year, far more than traditional deposits, investors say. But the coal company it was supposed to fund never obtained key licences for its activities, state media reported, and now the firm that structured it, China Credit Trust , says it may not be able to repay 3 billion yuan ( $492 million ) due on Friday. The situation is a test case for cleaning up the risky 'shadow banking' system in the world's second-largest economy. Analysts said the government could use a default to send a message about the danger of speculative investments, while showing Beijing's commitment to reining in the vast pools of capital threatening financial stability. Angry investors But at the same time authorities must walk a fine balance between cracking down and preventing protests by angry investors as well as setting off a chain reaction that sharply tightens credit in an economy where growth is already slowing. Chinese 'shadow banking' is a massive network of lending outside formal channels and beyond the reach of regulators, including activities by online finance platforms, credit guarantee companies and microcredit firms. It was as large as $4.8 trillion in 2012, more than half the country's gross domestic product, according to an estimate by ratings agency Moody's. China's powerful State Council , or cabinet, reportedly issued internal guidelines in December to crack down on the sector. But ratings agency Fitch said in a report: "The reforms may seem like a good beginning, but they have a long way to run." High net worth clients China Credit Trust sold the investment product from 2010 through branches of the Industrial and Commercial Bank of China (ICBC), to around 700 of the bank's high net worth clients. The trust channelled the funds to Zhenfu Energy in the country's mining heartland of Shanxi province. But the company's owner was detained by authorities in 2012, state media reported, raising questions over the viability of the firm. " ICBC and China Credit Trust dug a hole, covered it with a straw mat and told us to jump in," said Gao Yiyang, an investor who spent almost $500,000 of his family's money on the product. "It now appears our money was not used for any of the company's actual operations. It was purely fraud to get our money to fill a huge deficit hole," he said. In a letter sent to investors earlier this month, China Credit Trust said: "Currently, there is still uncertainty over whether the trust can be converted to cash before January 31 ." Products sold by China's roughly 65 trusts offer high returns.

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Source: Times of Oman

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