The 11th hour bailout by a mysterious third party has raised questions about China's readiness to let investors pay the price for failed investments and mounting risk in the country's shadow banking system. Three years ago, a group of wealthy Chinese investors put three billion yuan ( $500 million U.S.) into an investment trust -- the cheerfully named Credit Equals Gold #1 Collective Trust Product. The product was marketed by Industrial and Commercial Bank of China, a state-owned enterprise that is one of the largest and most profitable banks in the world. But the fund was designed and issued by China Credit Trust , one of the many shadow banks in China that offer loans to companies or individuals that may have trouble securing traditional bank financing. In this case, the product was underpinned by a loan to a troubled mining operation in northern China that would later collapse as the price of coal plummeted. Investors were promised a juicy 10% annual return over three years, but were told earlier this month not to expect payment. Some of the investors, who reportedly put as much as $500,000 U.S. each into the fund, said ICBC should reimburse them since it had marketed the product. ICBC insisted that it had never guaranteed the product, and had no legal responsibility to pay investors. The bank's chairman even went so far as to describe the episode as a learning opportunity for investors, shadow banks and ICBC. State media reports suggest that opportunity has been missed, thanks to a bailout by an unnamed third party that ensures investors will recover their initial investment. Interest will not be paid. A default could have prompted investors to pull their money from other trust products and stop providing the deposits needed to supply credit and fuel economic growth. The bailout seems to have eliminated that risk. But some analysts argue that a default is needed to demonstrate Beijing's commitment to allow market forces to play a larger role in the economy, and to send a message to investors that high-yield investments carry significant risk.
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