http://www.scmp.com/business/banking-finance/article/1412077/china-trust-products-fate-hangs-balance-amid-talk-bailout
http://www.scmp.com/business/banking-finance/article/1412873/icbc-bailout-trust-product-unlikely
Jane Cal in Beijing
Industrial and Commercial Bank of China has been holding firm against calls to compensate about 700 investors who bought the three-year trust product at its branches in Shanxi. The product, which raised funds for a coal miner in the province, was issued by China Credit Trust and distributed by the lender.
Jane Cai in Beijing and Bloomberg
http://www.scmp.com/business/banking-finance/article/1412873/icbc-bailout-trust-product-unlikely
ICBC bailout of trust product unlikely
A default may spook the financial system since a large number of trust products mature this year
PUBLISHED : Saturday, 25 January, 2014, 5:29am
UPDATED : Saturday, 25 January, 2014, 5:29am
Jane Cal in Beijing
ICBC chairman Jiang Jianqing said the bank would not "rigidly" pay back investors who lost money in the trust. Photo: Sam Tsang
Beijing appears to be shoring up its resolve to resist pressure for a bailout of a 3 billion yuan (HK$3.8 billion) trust product that is seen as a test of the willingness of authorities to push ahead with moves to reduce risks in the financial system caused by spiralling debt.
Industrial and Commercial Bank of China has been holding firm against calls to compensate about 700 investors who bought the three-year trust product at its branches in Shanxi. The product, which raised funds for a coal miner in the province, was issued by China Credit Trust and distributed by the lender.
ICBC chairman Jiang Jianqing said the lender would not "rigidly" pay back investors, CNBC reported on its website yesterday. The incident would serve as a lesson for investors on moral hazards and the risks associated with such investments, Jiang told CNBC from the World Economic Forum in Davos, Switzerland.
The chairman's comments followed those by an official at ICBC's Shanghai branch on Thursday that had provided encouragement to the trust's investors. "ICBC won't ignore the issue of its reputation," the officialShanghai Securities News quoted the official as telling some of these investors. The bank would take some responsibility over the matter, the official was quoted as saying.
However, Jiang's reported comments at Davos suggest that an outright bailout of the trust is slipping further away, even if his use of the term "rigidly" lends support to speculation that investors may yet receive some form of aid.
A banker said ICBC might pay some compensation in "a less obvious" way, rather than repaying directly, to avoid being held responsible for more possible defaults in the future. The Shanxi government denied it would bear 50 per cent of the responsibility, according to a report on its website on Thursday. It urged the involved parties to solve the problem "by market means".
The statement was a rebuttal to a report in Guangzhou-based Time Weeklynewspaper that ICBC and China Credit may join the Shanxi government in a bailout, with ICBC and China Credit Trust each taking responsibility for 25 per cent of payments for the trust and the Shanxi government covering the rest, citing an unidentified source.
Any default of the trust product - which matures on Friday - raises the spectre of a wave of similar defaults with implications for the stability of the financial system.
"Once a default takes place, it will set the precedent about who bears the losses when a large amount of trust products will mature this year," Goldman Sachs analysts said in a research report.
The product, Credit Equals Gold No 1, which had offered an annual return of 10 per cent, raised money for a coal miner that collapsed after its owner was arrested.
The China Banking Regulatory Commission has ordered its regional offices to increase scrutiny of credit risks in the coal industry, Bloomberg reported yesterday, citing two sources.
ICBC declined to comment and the trust company was unavailable for comment yesterday.
Liao Qiang, an analyst at Standard and Poor's, said he did not expect ICBC to commit to a bailout as the bank has "no legal ground to make such a move". "Chinese banks are unlikely to bail out high-yield wealth management products unless the banks happen to be the originator of the products," Liao said.
A source at a Shanghai-based trust firm said ICBC may be the originator. A research report from Beijing-based brokerage China Securities said ICBC charged 4 per cent as an intermediary fee for selling the product, while China Credit Trust charged 0.2 per cent.
"The high income ICBC made from the deal and the large size of the trust product suggest ICBC may be the one which initiated the high-risk product," the source said.
The Goldman Sachs analysts said that if the trust product's investors bear the losses, they will withdraw money from the shadow banking system.
China trust product's fate hangs in balance amid talk of bailout
Speculation mounts that investors may be bailed out, with 3b yuan product set to mature in days
PUBLISHED : Friday, 24 January, 2014, 2:19am
UPDATED : Friday, 24 January, 2014, 2:19am
Jane Cai in Beijing and Bloomberg
China Credit Trust and the product's distributor, Industrial and Commercial Bank of China (ICBC), may bail out investors in the troubled trust together with Shanxi provincial government, China media reported. Photo: Bloomberg
The fate of a three billion yuan (HK$3.81 billion) trust product that was expected to become the first trust default of the year hangs in the balance, with talk of the local government and the product's backers moving to avert a default.
China Credit Trust and the product's distributor, Industrial and Commercial Bank of China (ICBC), may bail out investors in the troubled trust together with Shanxi provincial government, the Guangzhou-based Time Weeklynewspaper reported yesterday.
When the three-year trust product matures on January 31, ICBC and China Credit Trust may each take responsibility for 25 per cent of payments for the trust, an unidentified source was quoted by the newspaper as saying.
Policymakers do not want to see any financial turbulence or social unrest
The product, Credit Equals Gold No1, raised money for a coal mining firm that collapsed after its owner was arrested.
The Shanxi government, where the company was based, may take responsibility for the remaining 50 per cent, the newspaper said. ICBC declined to comment and the trust firm was not available for comment yesterday.
"The whole thing has become tricky," an analyst at a Beijing-based brokerage said, adding that the securities firm has banned its analysts from openly talking about the issue.
"I thought China would allow the trust to default. However, as regulators and the local government step in, it seems policymakers do not want to see any financial turbulence or social unrest."
The trust investors yesterday met ICBC officials at a private-banking branch in Shanghai, demanding their money back.
Investors were asked to put in at least three million yuan in the trust product with a guarantee that it was "100 per cent safe", said Fang Ping, one of the 20 investors who met ICBC officials.
A source at a Shanghai-based trust firm said that ICBC may be held responsible for the current problems.
A research report from Beijing-based brokerage China Securities said ICBC charges 4 per cent as an intermediary fee for selling the product, while China Credit Trust charges 0.2 per cent.
"The high income ICBC made from the deal and the large size of the trust product suggest ICBC may be the one which initiated the high-risk product," the source said.
An executive with ICBC said last week the bank would not bail out the product. However, as more shadow banking products are set to default this year, regulators are increasingly concerned about its social impact, a source close to the China Banking Regulatory Commission said.
"Banks are directly or indirectly involved in shadow banking," the source said. "In some cases, they sell highly risky trust products to investors without sufficient risk disclosure. It is time to teach them a lesson."
The Shanxi government is getting involved probably under "political pressure", the source added.
The spotlight on the Shanxi Zhenfu-linked trust comes as concerns mount over similar products tied to other miners in the coal-rich province. Liansheng may default on its 384 million yuan trust product issued in November 2012, China Daily reported last month. Xin Bei Fang said it was unable to pay the expected yield of its 1.3 billion yuan trust product this month, reported Shanghai Securities News.
A banker said ICBC may pay some compensation in "a less obvious" way, rather than repaying directly.
China Credit said on Wednesday that a project backed by the product has obtained a new mining licence.
A default would shake investors' faith in the implicit guarantees offered by trust firms to draw funds from wealthy investors.
http://www.prudentbear.com/2014/01/credit-is-gold-1-and-icebergs.html
****
No less important is the historic – and ongoing - boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.
This week the markets seemed to begin taking the unfolding Chinese Credit crisis more seriously. There was talk early in the week of concerted efforts to save the troubled $496 million (“Credit Equals Gold No. 1”) trust product from a possible end-of-month default.
From Bloomberg: “Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing said the lender won’t compensate investors for losses tied to a troubled trust product distributed by the bank, CNBC reported… The incident will be a lesson for investors on moral hazard and risks associated with such investments, Jiang told CNBC… The… lender won’t take ‘rigid responsibility’ for the losses and will review all its partnerships in entities with which it does business, Jiang said…”
Savers, investors and speculators will indeed learn painful lessons in China Credit – and it’s difficult for me to envisage this learning process going smoothly. “Credit Equals Gold No.1” is the proverbial tip of the Iceberg for a Credit system today suffering from a historic gulf between saver perceptions of “moneyness” and the poor and deteriorating quality of much of underlying system Credit. Incredible quantities of finance have flowed freely into risky Credit vehicles with the expectation that the banks and governments (local and central) will not allow losses nor ever tolerate a crisis. This is precisely the recipe for Credit accidents and even disaster.
And while there will certainly be ongoing measures taken by the People's Bank of China and Chinese officials, the bottom line is that Credit conditions have meaningfully tightened for China’s corporate and local government borrowers. The weak reading on manufacturing conditions (HSBC PMI) earlier this week was viewed as confirmation that "Credit transmission" issues have begun impeding growth.
****
A shockwave is looming in China's multi-trillion dollar "shadow banking" system, with an unprecedented default only days away on a $500 million investment product sold to hundreds of people.
Staff at China's biggest bank ICBC pushed the "Credit Equals Gold #1 Trust Product" by promising returns of 10 percent a year, far more than traditional deposits, investors say.
But the coal company it was supposed to fund never obtained key licences for its activities, state media reported, and now the firm that structured it, China Credit Trust, says it may not be able to repay 3.0 billion yuan ($492 million) due on Friday.
The situation is a test case for cleaning up the risky "shadow banking" system in the world's second-largest economy.
Analysts said the government could use a default to send a message about the danger of speculative investments, while showing Beijing's commitment to reining in the vast pools of capital threatening financial stability.
But at the same time authorities must walk a fine balance between cracking down and preventing protests by angry investors -- as well as setting off a chain reaction that sharply tightens credit in an economy where growth is already slowing.
Chinese "shadow banking" is a massive network of lending outside formal channels and beyond the reach of regulators, including activities by online finance platforms, credit guarantee companies and microcredit firms.
It was as large as $4.8 trillion in 2012, more than half the country's gross domestic product, according to an estimate by ratings agency Moody's.
China's powerful State Council, or cabinet, reportedly issued internal guidelines in December to crack down on the sector.
But ratings agency Fitch said in a report: "The reforms may seem like a good beginning, but they have a long way to run."
China Credit Trust sold the investment product from 2010 through branches of the Industrial and Commercial Bank of China (ICBC), to around 700 of the bank's high net worth clients.
The trust channelled the funds to Zhenfu Energy in the country's mining heartland of Shanxi province. But the company's owner was detained by authorities in 2012, state media reported, raising questions over the viability of the firm.
"ICBC and China Credit Trust dug a hole, covered it with a straw mat and told us to jump in," said Gao Yiyang, an investor who spent almost $500,000 of his family's money on the product.
"It now appears our money was not used for any of the company's actual operations. It was purely fraud to get our money to fill a huge deficit hole," he told AFP.
In a letter sent to investors earlier this month, a copy of which was seen by AFP, China Credit Trust said: "Currently, there is still uncertainty over whether the trust can be converted to cash before January 31."
Products sold by China's roughly 65 trusts offer high returns and big risk, drawing comparisons to the West's "junk bonds" of the 1980s.
"Some central government-level policymakers could be open to seeing a default, as it would encourage more careful risk assessment," Goldman Sachs economist Andrew Tilton said in a recent research report.
But he added: "If the realisation of significant losses by investors causes others to pull back from funding various forms of shadow banking credit, overall credit conditions could theoretically tighten sharply with consequent damage to growth."
ICBC says it has no direct liability for the product. "We did not assume that kind of fixed responsibility," ICBC chairman Jiang Jianqing told US financial television channel CNBC.
"For investors, this incident provides them with a case whereby they can learn lessons. In future, when they invest in wealth (management) or other products, they must see clearly the risk," he said.
But Chinese investors have few choices on where to park their money, with low deposit rates, government controls over the property market, capital controls limiting overseas investment and one of the world's worst-performing stock markets last year.
The combination has caused a boom in informal lending offering better returns.
Investors might still get some money back. An insurance company and an asset management firm -- set up to handle banks' bad loans -- have been cited by state media as possible rescuers.
Richard Chang, a buyer who organised a gathering of investors in Shanghai, told AFP they would insist ICBC makes good any losses.
"We will never give up unless we get the money," he said.
****
No less important is the historic – and ongoing - boom in manufacturing capacity in China and throughout Asia. This has created excess capacity and increasing pricing pressure for too many manufactured things, a situation only worsened by Japan’s aggressive currency devaluation. This dilemma, with parallels to the commodity economies, becomes especially problematic because of the enormous debt buildup over recent years. While this is a serious issue for the entire region, it has become a major pressing problem in China.
This week the markets seemed to begin taking the unfolding Chinese Credit crisis more seriously. There was talk early in the week of concerted efforts to save the troubled $496 million (“Credit Equals Gold No. 1”) trust product from a possible end-of-month default.
From Bloomberg: “Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing said the lender won’t compensate investors for losses tied to a troubled trust product distributed by the bank, CNBC reported… The incident will be a lesson for investors on moral hazard and risks associated with such investments, Jiang told CNBC… The… lender won’t take ‘rigid responsibility’ for the losses and will review all its partnerships in entities with which it does business, Jiang said…”
Savers, investors and speculators will indeed learn painful lessons in China Credit – and it’s difficult for me to envisage this learning process going smoothly. “Credit Equals Gold No.1” is the proverbial tip of the Iceberg for a Credit system today suffering from a historic gulf between saver perceptions of “moneyness” and the poor and deteriorating quality of much of underlying system Credit. Incredible quantities of finance have flowed freely into risky Credit vehicles with the expectation that the banks and governments (local and central) will not allow losses nor ever tolerate a crisis. This is precisely the recipe for Credit accidents and even disaster.
And while there will certainly be ongoing measures taken by the People's Bank of China and Chinese officials, the bottom line is that Credit conditions have meaningfully tightened for China’s corporate and local government borrowers. The weak reading on manufacturing conditions (HSBC PMI) earlier this week was viewed as confirmation that "Credit transmission" issues have begun impeding growth.
****
Major default looms in China's
huge 'shadow banking' system
Customers are seen leaving an ICBC branch in Beijing, on December 13, 2011
Credit: Mark Ralston/AFP/File
Staff at China's biggest bank ICBC pushed the "Credit Equals Gold #1 Trust Product" by promising returns of 10 percent a year, far more than traditional deposits, investors say.
But the coal company it was supposed to fund never obtained key licences for its activities, state media reported, and now the firm that structured it, China Credit Trust, says it may not be able to repay 3.0 billion yuan ($492 million) due on Friday.
The situation is a test case for cleaning up the risky "shadow banking" system in the world's second-largest economy.
Analysts said the government could use a default to send a message about the danger of speculative investments, while showing Beijing's commitment to reining in the vast pools of capital threatening financial stability.
But at the same time authorities must walk a fine balance between cracking down and preventing protests by angry investors -- as well as setting off a chain reaction that sharply tightens credit in an economy where growth is already slowing.
Chinese "shadow banking" is a massive network of lending outside formal channels and beyond the reach of regulators, including activities by online finance platforms, credit guarantee companies and microcredit firms.
It was as large as $4.8 trillion in 2012, more than half the country's gross domestic product, according to an estimate by ratings agency Moody's.
China's powerful State Council, or cabinet, reportedly issued internal guidelines in December to crack down on the sector.
But ratings agency Fitch said in a report: "The reforms may seem like a good beginning, but they have a long way to run."
China Credit Trust sold the investment product from 2010 through branches of the Industrial and Commercial Bank of China (ICBC), to around 700 of the bank's high net worth clients.
The trust channelled the funds to Zhenfu Energy in the country's mining heartland of Shanxi province. But the company's owner was detained by authorities in 2012, state media reported, raising questions over the viability of the firm.
"ICBC and China Credit Trust dug a hole, covered it with a straw mat and told us to jump in," said Gao Yiyang, an investor who spent almost $500,000 of his family's money on the product.
"It now appears our money was not used for any of the company's actual operations. It was purely fraud to get our money to fill a huge deficit hole," he told AFP.
In a letter sent to investors earlier this month, a copy of which was seen by AFP, China Credit Trust said: "Currently, there is still uncertainty over whether the trust can be converted to cash before January 31."
Products sold by China's roughly 65 trusts offer high returns and big risk, drawing comparisons to the West's "junk bonds" of the 1980s.
"Some central government-level policymakers could be open to seeing a default, as it would encourage more careful risk assessment," Goldman Sachs economist Andrew Tilton said in a recent research report.
But he added: "If the realisation of significant losses by investors causes others to pull back from funding various forms of shadow banking credit, overall credit conditions could theoretically tighten sharply with consequent damage to growth."
ICBC says it has no direct liability for the product. "We did not assume that kind of fixed responsibility," ICBC chairman Jiang Jianqing told US financial television channel CNBC.
"For investors, this incident provides them with a case whereby they can learn lessons. In future, when they invest in wealth (management) or other products, they must see clearly the risk," he said.
But Chinese investors have few choices on where to park their money, with low deposit rates, government controls over the property market, capital controls limiting overseas investment and one of the world's worst-performing stock markets last year.
The combination has caused a boom in informal lending offering better returns.
Investors might still get some money back. An insurance company and an asset management firm -- set up to handle banks' bad loans -- have been cited by state media as possible rescuers.
Richard Chang, a buyer who organised a gathering of investors in Shanghai, told AFP they would insist ICBC makes good any losses.
"We will never give up unless we get the money," he said.
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