http://www.zerohedge.com/news/2014-01-27/china-trust-bailout-unidentified-buyer-distorts-market-risks-are-snowballing
( So much for the PBOC taking on moral hazard - until the unidentified buyer is identified , the assumption will be that it is the PBOC... )
China Trust "Bailout" To "Unidentified Buyer" Distorts Market As "Risks Are Snowballing"
In a 2-line statement, offering very few details, ICBC's China Credit Trust Co. said it reached an agreement to restructure the CEG#1 that ha sbeen at the heart of the default concerns in recent weeks. The agreement includes a potential investment in the 3 billion-yuan ($496 million) product but didn’t identify the source of funds, or confirm whether investors would get all of their money back. The media is very excited about this entirely provisional statement and we note, as Bloomberg reports, investors in the trust product must authorize China Credit Trust to handle the transaction if they want to recoup their principal which will involve the sale of investors' rights in the trust at face value (though no mention of accrued interest). As BofAML notes, however, "the underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time," and while this 'scare' may have raised investors' angst, S&P warns "a bailout of the trust product [leaves]Chinese authorities with a growing problem of moral hazard," and they have missed an opportunity for "instilling market discipline."
1) ICBC issues a 2 line statement on a CEG#1 restructuring - no details and no comments from anyone involved
China Credit Trust Co. said it reached an agreement to restructure a high-yield product that sparked concern over the health of the nation’s $1.67 trillion trust industry...Beijing-based China Credit Trust’stwo-line statement on its website didn’t identify the source of funds, or say whether investors would get all of their money back.
2) Investors claim they "could" be able to sell their rights to the CEG#1 trust to an "unidentified buyer" at par (though receive no accrued interest as far as is clear)
Industrial and Commercial Bank of China Ltd. told investors of a China Credit Trust product facing possible default about an offer in which they can receive back their full principal, according to an investor with direct knowledge of the offer.Rights in the 3 billion-yuan ($496 million) product issued by China Credit Trust Co. can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen.China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
3) “A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,”
As one analyst noted, the PBOC is running scared...“It indicates the government still won’t tolerate any ultimate default and retail investors will continue to be compensated in similar cases.”
4) This confirms S&P's recent warning that "A bailout of the trust product would leave Chinese authorities with a growing problem of moral hazard," and an opportunity for “instilling market discipline” will have been missed.
...said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
5) of course, China may have shown its moral hazard hand on this occasion but as BofAML warns, "We suspect that, at a certain point, the involved parties will be either unwilling or unable to bail them out [again], which may trigger a credit crunch...The underlying problem is a corporate sector insolvency issue... there may be many more products threatening to default over time."
There are plenty more trust products facing maturity/default in the short-term...
The most volatile part of the system is the financial market and the weakest link of the financial market is shadow banking. Within the shadow banking sector, we believe that the trust market faces the biggest default risk because credit quality here is among the lowest.The stability of the shadow banking sector is based on public confidence and any meaningful default will chip away some of the confidence. We suspect that trust defaults by private borrowers may work on public sentiment gradually while any LGFV trust default may immediately trigger significant market volatility. 2Q & 3Q this year will be another peak trust maturing period.
http://www.bloomberg.com/news/2014-01-27/icbc-offers-clients-option-to-recoup-funds-put-in-troubled-trust.html
( magic money bailout ? )
ICBC Offers Clients Option to Recoup Funds in Troubled Trust
Industrial & Commercial Bank of China Ltd. said investors in a troubled high-yield trust can recoup their funds, averting a threatened default that underscored concern over the shadow-banking system and helped spur a selloff in emerging-market currencies and stocks.
Rights in the 3 billion-yuan ($496 million) product issued by China Credit Trust Co. can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen. China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China's biggest bank, to contact their financial advisers.
The accord staves off a default that threatened to roil China’s markets and stoke concerns of financial fragility in emerging economies after assets from Argentina’s peso to the Turkish lira plunged last week. The bailout may encourage risk-taking by wealthy investors in China’s $1.7 trillion trust industry -- the fastest-growing part of the shadow-banking system -- even as authorities try to curtail the nation’s debt.
“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. Still, implicit guarantees distort the market and “delaying the first default means risks are snowballing,” he said.
Wealthy Investors
The Credit Equals Gold No. 1 high-yield product, issued by China Credit Trust and distributed by Beijing-based ICBC to its private-banking clients, was structured to raise funds from wealthy investors for a coal miner that collapsed in 2012. Shanxi Zhenfu Energy Group failed after its owner Wang Pingyan was arrested for illegally collecting deposits.
Investors in the trust product must authorize China Credit Trust to handle the transaction if they want to recoup their principal, Chen said, citing the offer document presented by ICBC. Beijing-based China Credit Trust’s two-line statement on its website didn’t identify the source of funds, or say whether investors would get their money back.
A call to ICBC’s Beijing-based press officer, Wang Zhenning, and two calls to the office of Pei Wei, manager of the Credit Equals Gold product at China Credit Trust, weren’t immediately answered. China Credit Trust board secretary Wei Qing also didn’t return a call seeking comment.
Soaring Assets
Assets managed by China’s 67 trust companies soared 60 percent to $1.67 trillion in the 12 months ended September, according to the China Trustee Association, even as policy makers sought to curb money flows outside the formal banking system. China’s shadow banking industry, which includes wealth management products issued by banks, has expanded to $5.95 trillion, JPMorgan Chase & Co. estimated in May.
A bailout of the trust product would leave Chinese authorities with a growing problem of moral hazard and other potential problems in the system, Standard & Poor’s said in a Jan. 24 statement. An opportunity for “instilling market discipline” will have been missed, it said.
China Credit Trust in February 2011 issued Credit Equals Gold with an indicated annual rate of return of 9.5 percent to 11 percent for different tranches of investors, according to sales documents posted on the company’s website. The trust offered an attractive alternative to putting the funds in bank accounts, which offer 3 percent interest on one-year deposits.
Funding Acquisitions
The proceeds were meant to buy equity stakes in Zhenfu Energy to help fund the acquisition of four coal mines, upgrade equipment and set up factories, the documents show. Wang Pingyan owned about 90 percent of Zhenfu Energy at that time, while his father Wang Yusuo held 10 percent. The two sold a 49 percent stake to the trust product while putting up their remaining holding as collateral, the documents show.
Investors had been asked to put at least 3 million yuan each into the trust product with guarantees that it was “100 percent safe,” said Fang Ping, one of 20 investors who went to ICBC’s private-banking branch last week to demand repayment.
ICBC, China’s largest lender, charged a 4 percent fee on the product as its ultimate designer and distributed it to more than 700 of its private-banking clients, according to a Jan. 16 research note by China Securities Co. China Credit Trust took a 0.2 percent fee for acting as a conduit that allowed ICBC to offer off-balance sheet financing to Zhenfu Energy, Huang Wentao, an analyst at China Securities, wrote in the note.
‘Off the Hook’
China Credit Trust made three interest payments since 2011 totaling 670.9 million yuan, according to a statement dated Jan. 16 that was posted on the trust company’s website.
ICBC began rejecting calls to bail out the investors 10 days ago after the Guangzhou Daily reported that the lender may be forced to repay investors when the product matures at the end of this month. That stoked concern that the nation’s first default in a decade on such high-yield investments was looming.
“Looks like everyone is off the hook here,” Gavin Parry, managing director of brokerage Parry International Trading Ltd. in Hong Kong, said in an e-mail. “We also avert a bullet for the money markets, as rates were sure to spike on a default.”
Comment of note.....from the ZH Article below.....
Sun, 01/26/2014 - 23:18 | 4370212Leraconteur
I live and bank in China. They do NOT shut down the banking system the entire week of the holiday. Never done that. total nonsense. In fact banks are often open every day of the year except for a few days. Saturday and Sunday open, too.
The holiday begins Friday, the holiday WEEK is not THIS week, it is NEXT week.
'Banking Holiday' the week before? Nonsense.
No transfers or FX conversions? Never happened before.
http://www.zerohedge.com/news/2014-01-26/no-there-no-stoppage-cash-transfers-china
( Zero Hedge clears this up quickly... or do they ? BTW , the Forbes story has disappeared ! )
No, There Is No Stoppage Of Cash Transfers In China
Earlier today, Forbes managed to spook readers with a bombastic report that China's commercial banks had been instructed by the PBOC to halt cash transfers - something which would have dire implications on China's banking system ahead of its new year holiday, and send the banking system into a tailspin just as China is desperate to avoid all turbulence ahead of a potential shadow banking default.
Leaving aside the fact that one should typically rely on official PBOC advisories, posted quite clearly on its website (where one finds no mention of this notice), one could simply keep track of interbank liquidity indicators such as repo and SHIBOR, both of which dropped, indicating that liquidity actually improved.
Anyway, here is what really happened, as reported by China Compass. "Forbes columnist Gordon Chang claimed in a much-quoted item today that the Peoples Bank of China had instructed commercial banks to halt cash transfers. Chang's column, entitled “China Halts Bank Transfers,” specifically refers to Citibank's Chinese branches. The report is entirely misleading." Our advice - focus on the real "weakest links" in China's banking system, of which there are many and are backed by facts, not the least of which is the potential upcoming shadow banking default. Ignore groundless rumors and speculation.
More from China Compass:
According to Citibank China Customer Service, the bank is conducting a routine system upgrade over the first few days of the upcoming New Year bank holiday. System maintenance of this sort has occurred several times in the past.The PBOC has not—repeat not—asked Citibank to stop customers from wiring funds. Customers can still log on to their account to put in fund transfer requests at any time. The receiving bank (non-Citibank) will process the funds to be transferred on the next business day, as it always does. Because of the Lunar New Year break, the next business day is Friday Feb. 7. This is no different from the practice of banks throughout the world.Chang's understanding of Chinese culture evidently does not extend to the timing of bank holidays.
January 30, 2014 4PM is the afternoon of the Chinese New Year eve. Nobody will be around by 5PM as the Hong Kong stock exchange has a half-day trading day.
Citibank's customer web site offered the following notice:
Important Notice:
1. Due to the system maintenance of People's Bank of China, Domestic RMB Fund Transfer through Citibank (China) Online and Citi Mobile will be delayed during January 30th 2014, 16:00pm to February 2nd 2014, 18:30pm. As to the fund availability at the receiving bank, it depends on the processing requirements and turnaround time of the receiving bank. We apologize for any inconvenience caused.
2. During Spring Festival, Foreign Currency Transfer Transaction through Citibank (China) Online and Citi Mobile will be temporally not available from January 30, 2014 18:00pm to February 7, 2014 09:00am. We apologize for any inconvenience caused.
If you have any enquiries, please reach us via our 24-hour banking hotline at 800-830-1880 or credit card hotline at 400-821-1880. If you are calling from other parts of the world, please reach us at 86-20-38801267 for banking services or 86-21-38969500 for credit card services.
* * *
All that said, China certainly has all too real liquidity (and solvency) problems, as explained here extensively in the prior weeks and months, captured best by the fact that both China's and HSBC's CDS are both at multi-month highs.
http://www.forbes.com/sites/gordonchang/2014/01/26/china-halts-bank-cash-transfers-2/
The People’s Bank of China , the central bank, has just ordered commercial banks to halt cash transfers.
This notice, for instance, appears on the online portal for Citigroup's C -2.74%Citibank unit for its China customers:
Important Notice:
1. Due to the system maintenance of People’s Bank of China, Domestic RMB Fund Transfer through Citibank (China) Online and Citi Mobile will be delayed during January 30th 2014, 16:00pm to February 2nd 2014, 18:30pm. As to the fund availability at the receiving bank, it depends on the processing requirements and turnaround time of the receiving bank. We apologize for any inconvenience caused.
2. During Spring Festival, Foreign Currency Transfer Transaction through Citibank (China) Online and Citi Mobile will be temporally not available from January 30, 2014 18:00pm to February 7, 2014 09:00am. We apologize for any inconvenience caused.
If you have any enquiries, please reach us via our 24-hour banking hotline at 800-830-1880 or credit card hotline at 400-821-1880. If you are calling from other parts of the world, please reach us at 86-20-38801267 for banking services or 86-21-38969500 for credit card services.
In short, there will be a three-day suspension of domestic renminbi transfers. There will also be a suspension, spanning nine calendar days, of conversions of renminbi to foreign currency.
The specific reason given—“system maintenance” at the central bank—is preposterous. It is not credible that during the highest usage period in the year—the weeklong Lunar New Year holiday beginning January 31—the central bank would schedule an upgrade and shut down cash transfers.
A better explanation is that the country’s banking system is running dry. Yes, there is an increased need for money in the run-up to and during the Lunar New Year holiday, but that is only a small factor. After all, central bank officials knew this spike in demand was coming—it occurs every year at this time—and a core function of central banks is to manage seasonal liquidity fluctuations. Moreover, the holiday has not started yet, and the PBOC, as that institution is known, could have added more liquidity to meet cash needs.
So what’s really going on? This crunch follows similar incidents in June and December of last year. In June, for instance, the central bank used the excuse of a “system upgrade” to allow banks to shut down their ATMs and online banking platforms. As a result, they conserved cash and thereby avoided a nationwide meltdown.
So today’s “system maintenance” notice is a sign of a fundamental problem. Banks, in short, need cash to rollover ever-increasing amounts of nonperforming loans and wealth management products. This month, cash needs are even higher than normal because of the impending default of the Credit Equals Gold wealth product scheduled for January 31. Analysts are worried that the failure, if it occurs, will cause a China-wide panic.
Perhaps more important, the Federal Open Market Committee is holding its next meeting on January 28-29 so there could be an announcement on the 29th on the trimming of bond purchases. The suspension of FX transactions means that speculators will not be able to dump renminbi and buy dollars. Fed Chair Bernanke’s words on tapering, beginning in May of last year, shook emerging markets. A FOMC announcement this time could undermine China, especially because of the darkening perceptions about that country.
Pundits, pointing to the nation’s $3.82 trillion in foreign exchange reserves, are fond of saying that Beijing has enough money to weather any situation. Yet China does not have a foreign currency crisis. It has a domestic currency one where dollars, euros, pounds, and yen are not much use.
Banks are evidently scrambling for cash. They have, in the past, resorted to desperate maneuvers at the ends of calendar quarters to meet regulatory requirements. The current crunch is even more alarming because it cannot be occurring for quarter-end reasons.
Something is very wrong in China at the moment. Banks’ apparent need to conserve cash, coming just weeks after the last incident, looks ominous.
