China shadow-bank product defaults as coal company can’t repay; It Begins… Another High-Yield Chinese Shadow Banking Trust Defaults

China shadow-bank product defaults as coal company can’t repay – paper

Wed, Feb 12 2014

(Corrects spelling of coal firm to Liansheng, not Lianmeng)

* Jilin Trust products worth $126 million have defaulted – paper

* Trust products based on loan to deeply indebted coal company

* Products sold through China Construction Bank

* Jilin Trust working to recover investor funds

SHANGHAI, Feb 12 (Reuters) – A high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday, in the latest sign of financial stress in China’s shadow bank sector.

The product, which raised 289 million yuan ($47.7 million) from wealthy clients of China Construction Bank (CCB) , China’s second-largest lender, was created by Jilin Province Trust Co Ltd and backed by a loan to a coal company, Shanxi Liansheng Energy Co Ltd.

“It matured on Feb. 7, but CCB passed on an announcement from Jilin Trust saying ‘We currently can’t be certain when (Liansheng) funds will be returned,'” the official Shanghai Securities News quoted an unnamed investor in the trust product as saying.

Though the maturity date has already passed, producing a technical default, Jilin Trust appears to be working to recover investor funds.

“Restructuring isn’t bankruptcy. As far as we know, there is no problem with the firm’s assets. The firm is in negotiations with investors,” the paper quoted an unnamed Jilin Trust official as saying.

Jilin did not immediately respond to requests seeking comment on Tuesday morning.

Chinese markets were on edge last month when a similar product created by China Credit Trust Co Ltd warned investors that it might not pay off on time when it matured on Jan. 31. That product was also based on a loan to an indebted coal producer in Shanxi.

In the end, however, investors in China Credit Trust’s “Credit Equals Gold” product recovered their principal when an unnamed investor stepped in to purchase collateral assets.. In this case, default has already occurred, the paper said.

The popularity of investment trusts and other so-called wealth management products has exploded in recent years, with banks and trust firms marketing them as a high-yielding alternative to traditional bank deposits.

Analysts warn that default risk from such off-balance-sheet loans is rising. Funds raised through the sale of these products typically flow to weak borrowers that struggle to access bank loans, especially property developers, local governments and firms in industries plagued by overcapacity.

The fourth tranche of Jilin Trust’s product named “Songhua River #77 Shanxi Opulent Blessing Project” raised 289 million yuan from investors in February 2012, promising a 9.8 percent annualised return.

The previous three tranches, launched in late 2011, totalled 474 million yuan and also matured late last year without paying investors as planned. The final two tranches, amounting to a further 209 million yuan will mature in the coming weeks, the paper reported.

China’s coal industry has been battered by overcapacity and falling prices. China’s bank regulator recently warned lenders to guard against the risk of rising bad debts from the sector.

In late November, Liansheng petitioned a court in the coal-rich central Chinese province of Shanxi for debt restructuring. At a press conference at the time, the court said the firm and its affiliates had financial liabilities totalling 30 billion yuan and had lost their ability to service their debts.

Technical defaults caused by repayment delays have occurred before, but market watchers say that China’s shadow bank sector is still waiting for a precedent-setting default in which investors are forced to absorb substantial losses.

Such an event could shatter the widespread assumption that even high-yielding investments carry an implicit guarantee from state banks. But Jilin Trust is apparently still looking for ways to recover investors’ funds.

 

Investors’ funds at risk as trust product sold by CCB defaults

Wednesday, 12 February, 2014, 1:27pm

Business›Banking & Finance

INVESTMENT

Reuters in Shanghai

Loan to debt-ridden coal firm highlights shadow banking risks as trust works to recover funds

A high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured on Friday, state media reported yesterday, in the latest sign of financial stress in the mainland’s shadow banking sector.

The product, which raised 289 million yuan (HK$367 million) from wealthy clients of China Construction Bank, the country’s second-largest lender, was created by Jilin Province Trust and backed by a loan to a coal company, Shanxi Lianmeng Energy.

“It matured on February 7, but CCB passed on an announcement from Jilin Trust saying ‘We currently can’t be certain when [Lianmeng] funds will be returned,'” the official Shanghai Securities News quoted an unnamed investor in the trust product as saying.

Restructuring isn’t bankruptcy … there is no problem with the firm’s assets

JILIN PROVINCE TRUST OFFICIAL

Though the maturity date has already passed, producing a technical default, Jilin Trust appears to be working to recover investor funds.

“Restructuring isn’t bankruptcy. As far as we know, there is no problem with the firm’s assets. The firm is in negotiations with investors,” the paper quoted an unnamed official of the trust company as saying.

Chinese markets were on edge last month when the vendor of a similar product created by China Credit Trust warned investors that it might not pay off on time when it matured on January 31. That product was also based on a loan to an indebted coal producer in Shanxi.

In the end, however, investors in China Credit Trust’s Credit Equals Gold product recovered their principal when an unnamed investor stepped in to purchase collateral assets.

However, in this case, default has already occurred, the paper said.

The popularity of investment trusts and other so-called wealth management products has exploded in recent years, with banks and trust firms marketing them as a high-yielding alternative to traditional bank deposits.

Analysts warn that default risk from such off-balance-sheet loans is rising.

Funds raised through the sale of these products typically flow to weak borrowers that struggle to access bank loans, especially property developers, local governments and firms in industries plagued by overcapacity.

The fourth tranche of Jilin Trust’s product named “Songhua River #77 Shanxi Opulent Blessing Project” raised 289 million yuan from investors in February 2012, promising a 9.8 per cent annualised return.

The previous three tranches, launched in late 2011, totalled 474 million yuan and also matured late last year without paying investors as planned.

The final two tranches, amounting to a further 209 million yuan, will mature in the coming weeks, the Shanghai Securities News reported.

The mainland coal industry has been battered by overcapacity and falling prices. The bank- ing regulator recently warned lenders to guard against the risk of rising bad debts from the sector.

In late November, Lianmeng petitioned a court in the coal-rich central province for debt restructuring.

At a news conference at the time, the court said the firm and its affiliates had financial liabilities totalling 30 billion yuan and had lost their ability to service their debts.

Technical defaults caused by repayment delays have occurred before, but market watchers say that the mainland’s shadow banking sector is still waiting for a precedent-setting default in which investors are forced to absorb substantial losses.

Such an event could shatter the widespread assumption that even high-yielding investments carry an implicit guarantee from state banks.

But Jilin Trust is apparently still looking for ways to recover investors’ funds.

 

It Begins… Another High-Yield Chinese Shadow Banking Trust Defaults

Tyler Durden on 02/12/2014 21:58 -0500

While the eyes of the world were focused on the now infamous “Credit Equals Gold #1” Chinese wealth management product – it’s imminent default and last-minute bailout by ‘investors’ unknown – the coal industry in China continued to collapse (as we noted here). We noted at the time howbailing out current high-yield product investors would merely amplify the problems down the line and it seems that Chinese authorities have heard that message. As Reuters reports, a high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday.

Via Reuters,

A high-yield investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, state media reported on Wednesday, in the latest sign of financial stress in China’s shadow bank sector.

It matured on Feb. 7, but CCB passed on an announcement from Jilin Trust saying ‘We currently can’t be certain when (Liansheng) funds will be returned,'” the official Shanghai Securities News quoted an unnamed investor in the trust product as saying.

Though the maturity date has already passed, producing a technical default, Jilin Trust appears to be working to recover investor funds.

“Restructuring isn’t bankruptcy. As far as we know, there is no problem with the firm’s assets. The firm is in negotiations with investors,” the paper quoted an unnamed Jilin Trust official as saying.

Backed by China’s 2nd largest lender China Construction Bank (note we discussed the largest shadow-bank here), the product is as follows:

The fourth tranche of Jilin Trust’s product is name “Songhua River #77 Shanxi Opulent Blessing Project” raised 289 million yuan from investors in February 2012, promising a 9.8% yield – we will see if this technical default results in actual losses for investors.

backed by a coal-industry loan to Shanxi Liansheng Energy Co Ltd…

Shares of China’s biggest listed coal producers have dropped to their lowest valuations on record as falling fuel prices make it harder to repay debt.

image001-4

 

 

China’s coal industry is “dead,” said Laban Yu, a Jefferies Group LLC analyst in Hong Kong with an underperform rating on all three stocks. “There are 10,000 producers in China. A lot of them are taking on debt. It gets harder and harder to service debts when coal prices keep falling.

and the risk of more defaults is not going away – in fact will onkly get worse in the next 3 months!!

 

image002-3

For those who have forgotten, below is a quick schematic of what a WMP looks like:

image003-3

As Michael PettisJim ChanosZero Hedge (numerous times), and now George Soros have explained. Simply put –

“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.”

The “eerie resemblances” – as Soros previously noted – to the US in 2008 have profound consequences for China and the world – nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained above.

 

The bottom-line is that China seems to be testing the reaction of markets to small ‘technical’ defaults (such as this one)…

Technical defaults caused by repayment delays have occurred before, but market watchers say that China’s shadow bank sector is still waiting for a precedent-setting default in which investors are forced to absorb substantial losses.

Such an event could shatter the widespread assumption that even high-yielding investments carry an implicit guarantee from state banks. But Jilin Trust is apparently still looking for ways to recover investors’ funds.  

The question is – doe s the PBOC really think that desparate borrowers will stop borrowing – and contract the size of the shadow-banking system reining in the out of control credit creation (and its subprime-like consequences)…

As we previously noted,

…borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).

Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.

Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.

So the PBOC’s efforts are merely exacerbating the situation for the worst companies…

However, this just hit the wire…

*CHINA BANS BOND TRADE BETWEEN PROPRIETARY, WMP ACCOUNTS

Which sounds ominously like the PBOC won;t allow banks to bail their own WMP investors out and take the risky crap back on their off-balance-sheet books… i.e. The PBOC wants real defaults… not ‘technical’ defaults

 

More China Trust Product Defaults Trigger Shadow Banking Fear

By Moran Zhang

on February 12 2014 2:28 PM

The relief brought by a last-minute bailout that averted the default of a 3 billion yuan ($495 million) trust product in China was short-lived.

The rescued product had been backed by loans to a now-defunct coal mining company, and now, merely a week after the bailout (by an unnamed third party), another high-yield investment product backed by a loan to a debt-ridden coal company, Liansheng Group, is making headlines. Only this time, technical defaults have already occurred, underlining the financial stress in the country’s vast shadow banking sector.

These investment products are issued by trusts, which often funnel money into industries that banks are reluctant to lend. In most cases, investors have no idea where the money is being invested. For all they know, they are purchasing these products through major state-owned banks and are promised handsome interest returns.

Among these capital-intensive and high-risk areas is the coal industry. Chinese regulators have long expressed concerns about the risks in the coal industry and have in effect barred banks from lending cash to miners. Yet, shadow banks are more than willing to plug the financing gap.

From late 2011 to early 2012, Jilin Trust, a nonbank financial institution, sold to investors an investment product worth 1 billion yuan backed entirely by loans to Liansheng Group.

According to the official Shanghai Securities News, the first four tranches (out of a total of six) have already fallen into default. They are valued at a combined 764 million yuan.

The fourth tranche of Jilin Trust’s product named “Songhua River #77 Shanxi Opulent Blessing Project,” worth 289 million yuan, was distributed by China Construction Bank Corporation (SHA:601939), the country’s second-largest lender, to its retail customers as wealth management products (WMPs), offering an attractive 9.8 percent annual return.

“It [the fourth tranche] matured on Feb. 7, but CCB passed on an announcement from Jilin Trust saying, ‘We currently can’t be certain when [Lianmeng] funds will be returned,’” the Shanghai Securities News quoted an unnamed investor in the trust product as saying.

The final two tranches, amounting to a further 209 million yuan, will mature in the coming weeks, the paper reported.

Overcapacity and plunging coal prices have hit Chinese coal miners hard. The fortunes of Liansheng and its charismatic founder, Xing Libin, mirrored the rise and fall of China’s coal mining sector.

Xing gained fame in China for spending 70 million yuan on his daughter’s 2012 wedding. He rented three jets to fly family and friends to the resort island of Hainan, brought in pop stars for a gala concert, and assembled a fleet of six Ferraris for the wedding procession. More than a year later, he found himself struggling under a pile of debts.

Last November, Liansheng Group, which used to be the largest private coal firm in Shanxi province, received approval from the Liulin County People’s Court to restructure the company, according to the state-runXinhua News Agency. Liansheng Group has debts of nearly 30 billion yuan and “has lost the ability to repay,” the report said.

Though the maturity date has already passed, producing a technical default, Jilin Trust appears to be working to recover investor funds.

“Restructuring isn’t bankruptcy. As far as we know, there is no problem with the firm’s assets. The firm is in negotiations with investors,” Shanghai Securities News quoted an unnamed official of the trust company as saying.

Liansheng’s default is not the first in China’s trust sector, and it is unlikely to be the last.

More than 8,500 trust products are due this year, valued at roughly 1.3 trillion yuan. That’s a more than 50 percent increase from 2013, reports the Chinese-language 21st Century Business Herald. Clearly, 2014 will be a year to test the Chinese government’s determination to reform its financial sector.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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