Chinese Investors Try Police to Recoup Funds; Customers Say Product Is in Default; Trouble in Shadow Lending

Chinese Investors Try Police to Recoup Funds

Customers Say Product Is in Default; Trouble in Shadow Lending

LINGLING WEI

Updated Jan. 21, 2014 2:14 p.m. ET

BEIJING—In the latest sign of trouble in China’s loosely regulated shadow-banking sector, angry bank and insurance customers who bought an investment product that they say has since failed appealed to authorities to help them recoup about one billion yuan ($167 million).The apparent collapse of the product, which customers said was offered by an investment firm through some of China’s largest banks and insurance companies, represents one of the most prominent defaults in China in recent years. The case underscores concern among economists and analysts both inside and outside China that loans made by shadow bankers—an assortment of trust companies, securities firms, insurance companies and other private lenders—could be subject to defaults as Chinese economic growth slows.

The product in question involves about one billion yuan in funds raised in 2012 by a little-known investment firm, Beijing Roll-In Investment Co. Beijing Roll-In planned to invest the money in several public housing projects backed by the government in the city of Chengdu, in western China, according to a dozen of its investors interviewed by The Wall Street Journal.

The principal came due at the end of last year, but so far Beijing Roll-In hasn’t paid the investors, they say.

Officials at Beijing Roll-In didn’t return requests for comment. In a notice posted on its website on Monday, Beijing Roll-In said it had paid investors 100 million yuan in interest that day and would pay another 60 million yuan to them before the Lunar New Year, the most important holiday on the Chinese calendar.

The new year begins on Feb. 1.

On Tuesday, about a dozen investors gathered at a branch of the Beijing Municipal Public Security Bureau, the city’s police, and asked the agency to start investigating the alleged default, which has led to the loss of what the investors call their “xue han qian,” or blood and sweat money.

An official at the agency said it would investigate the investors’ claims.

Officials at China’s top banking regulator, which also oversees the shadow-banking sector, declined to comment. In the past, they have said troubles in shadow banking are “manageable” and won’t threaten the country’s overall financial stability.

“I bought into the product only because it was said to be both principal and interest guaranteed,” said He Yujing, a Beijing resident who put in one million yuan in exchange for a 10% advertised return. “But now, not only did I not receive the promised return but also lost my principal.”

Said Wan Xia, an investor in the southwestern Chinese metropolis of Chongqing, “the firm hasn’t paid us anything.”

The customers said Beijing Roll-In raised the money from clients of Ping An Insurance601318.SH +0.99% Group Co., Industrial Bank Co. 601166.SH +1.83% , China Construction Bank Corp. 601939.SH +0.51% and China Minsheng Banking Corp.600016.SH +1.14% , among other big Chinese financial institutions. Representatives at Ping An Insurance and the banks that investors said marketed the product for Beijing Roll-In didn’t respond to requests for comment on Tuesday.

Firms like Beijing Roll-In are an important part of China’s shadow-banking system. They arrange financing for projects, raising money from investors by promising annual returns that can exceed 10%, far higher than bank-deposit rates.

Investments sold through these firms have slipped into default in the past, but investors haven’t suffered losses because troubled borrowers have generally been bailed out by the government, enabling shadow lenders to make good on their obligations. However, such bailouts set the government up for wider losses if defaults spread, a growing worry as China’s economic expansion slows.

Shadow bankers often lend to borrowers considered too risky for traditional banks, such as debt-burdened local governments, property developers and coal producers. Often, traditional banks and other big financial institutions in China sell investment products on these lenders’ behalf as a way to offer higher yields to customers.

The shadow-banking sector is lightly regulated and opaque, and there isn’t any official data on defaults on these informal loans. But many analysts expect to see more go bad, potentially harming traditional lenders. “We do not see this as an isolated occurrence and expect to see headlines on similar credit events throughout the year,” said Zhang Zhiwei, Nomura’s China economist.

The pace of shadow-loan defaults appears to be “accelerating rapidly,” analysts at Bank of America Merrill Lynch said in a Jan. 16 report. Many of the defaults so far have involved loans made by so-called trust companies, a pillar of China’s shadow-banking sector.

For instance, pressure has been building in recent weeks on a major trust company, China Credit Trust Co., and Industrial & Commercial Bank of China Ltd.601398.SH +0.59% , China’s largest bank by revenue, to bail out investors facing a nearly $500 million hit.

China Credit has been unable to recoup three billion yuan related to a loan that underpins products sold to investors via ICBC branches. It said in a notice to investors last week that it wasn’t sure whether they would be repaid when the loan matures at the end of this month. ICBC says it isn’t responsible for any losses. China Credit declined to comment beyond confirming the notice.

ChinaScope Financial, a Shanghai-based financial-data provider, estimates that nearly 117 billion yuan worth of trust loans will come due this year. Any loss on these loans could make it harder for shadow lenders to raise new funds to finance their existing obligations as they come due.

The product sold by Beijing Roll-In offered returns of between 10% and 13%, according to the investors. They say a prospectus issued by the company included standard disclosures on risk, but said both investors’ principal and interest would be guaranteed by a third-party firm.

“Ping An Insurance really talked up the product, and when they pitched it to me in 2012, they said they were only offering this product to their VIP clients,” said Tian Zhu, an investor who bought the product from the insurance company.