ICBC Won’t Repay Troubled China Trust Product, Official Says

ICBC Won’t Repay Troubled China Trust Product, Official Says

Industrial & Commercial Bank of China Ltd. is rejecting calls to bail out a troubled 3 billion-yuan ($495 million) trust product, a bank official with knowledge of the matter said, stoking concern that the nation’s first default on such high-yield investments may be looming.ICBC, which distributed the product sold by a trust company to raise funds for Shanxi Zhenfu Energy Group, won’t assume primary responsibility after the coal miner collapsed, according to the executive, who asked not be identified while negotiations continue. China’s largest bank may be forced to repay investors, most of whom were Beijing-based ICBC’s own private banking clients, Guangzhou Daily reported yesterday.

A default on the investment product issued by China Credit Trust Co., which comes due Jan. 31, may shake investors’ faith in the implicit guarantees offered by trust companies to lure funds from wealthy people. Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September even as policy makers sought to curb money flow outside the formal banking system.

“Nobody wants this default to become a trigger for a financial crisis,” Xue Huiru, a Shanghai-based analyst at SWS Research Co., said of China Credit Trust’s product. “Breaking the implicit guarantee may help the long-term development of China’s financial system, but the short-term pain would be too much for the economy to take.”

Insolvent Miner

The principal amount on the trust product known as Credit Equals Gold No. 1 may not be paid back when the debt matures at the end of this month because the closely held coal miner from Shanxi province became insolvent after its owner was arrested in May 2012 for illicitly accepting deposits, Guangzhou Daily said yesterday. ICBC may need to assume most of the responsibility for bailing out investors because it’s the custodian and distributor, the government-owned newspaper said.

ICBC doesn’t plan to use its own money to repay investors, Reuters reported yesterday. The stock fell 1.2 percent to HK$4.88 in Hong Kong trading as of 3:08 p.m., and dropped 0.6 percent to 3.41 yuan in Shanghai.

There’s been no progress in the talks between China Credit Trust, Zhenfu Energy and local-government officials on how to compensate investors, China Business News reported today, citing the latest notice to investors.

Executives at Zhenfu Energy couldn’t immediately be reached because the company doesn’t have a listed phone number or website. An official at China Credit Trust who asked not to be identified said information would only be provided to investors.

Shadow Banking

China Credit Trust sold the product with an indicated annual rate of return of 9.5 percent to 11 percent for different tranches of investors, according to a sales document.

Trusts，the fastest-growing segment of China’s shadow banking industry, typically require people to invest at least 1 million yuan for one to two years as an alternative to putting the funds in bank accounts, which offer 3 percent interest on one-year deposits.

“This case has become the focal point of the trust sector in China, with interested parties wondering if this will become the first case in which investors take a loss,” Zhang Zhiwei, a Hong Kong-based economist at Nomura Holdings Inc., wrote in a note yesterday. A default may lead to “a downturn in sentiment in the trust sector which would have the potential to trigger a ripple effect on the financial system.”

Rising Popularity

The investment products from the trust firms, which are mostly controlled by government-affiliated companies, have gained popularity because of the higher returns and implicit guarantees on repayment. Foreign investors such as Barclays Plc, Morgan Stanley and JPMorgan Chase & Co. have bought stakes in at least 10 local trust companies in recent years.

China’s shadow-banking system, which encompasses a range of investments from trusts to banks’ wealth management products and private lending among individuals, was estimated at about $6 trillion by JPMorgan in May 2013, or 69 percent of the nation’s 2012 gross domestic product.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net