(Updates with comment from former head of China’s banking regulator in fourth paragraph.)
Jan. 23 (Bloomberg) -- Industrial & Commercial Bank of China Ltd. and China Credit Trust Co. may together with the government bail out investors in a troubled trust that sparked concern of defaults on high-yield investment products, according to the Time-Weekly newspaper.
ICBC and China Credit Trust may each take responsibility for 25 percent of payments for the 3 billion-yuan ($496 million) trust, the newspaper reported on its website today, citing a person it didn’t identify. The Credit Equals Gold No. 1 product raised money for a coal mining company that collapsed after its owner was arrested. The government of Shanxi province, where the company was based, may take responsibility for the remaining 50 percent, according to the report on the website of Guangzhou city-based Time-Weekly.
The investment product comes due Jan. 31 and a default may shake investors’ faith in the implicit guarantees offered by trust companies to draw funds from wealthy investors. 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 flows outside the formal banking system.
“It’s a problem with the sales and marketing of these products,” Liu Mingkang, former head of the China Banking Regulatory Commission, said in an interview from the World Economic Forum in Davos, Switzerland. “They should have made clear that the return rate is not guaranteed and what kind of risks are involved. There shouldn’t be an ironclad guarantee at all.” China’s banking watchdog regulates trusts.
Wang Zhenning, an ICBC spokesman, declined to comment when contacted by telephone today. Two phone calls to the office of China Credit Trust Board Secretary Wei Qing went unanswered.
The final version of the bailout plan may only be known next week, according to Time-Weekly. The paper is owned by Guangdong Provincial Publishing Group, which had sales of 5 billion yuan in 2012, according to the publisher’s website.
ICBC had rejected calls to bail out the product it distributed for China Credit, a bank official with knowledge of the matter said Jan. 17. China Credit raised the funds for Shanxi Zhenfu Energy Group. The coal miner’s owner, Wang Pingyan, was arrested in 2012 for taking deposits illegally, according to the Shanghai Securities News.
ICBC won’t assume primary responsibility for the product, according to the executive, who asked not be identified while negotiations continue.
A project backed by the product obtained a new mining license, the Securities Times reported yesterday, citing a statement from China Credit. Another coal mine project has won support from local authorities and the community, it said. Obtaining licenses will permit the mines to start operating and produce coal for sale.
State-owned People’s Insurance Company (Group) of China Ltd. is the largest shareholder of Beijing-based China Credit with a 32.9 percent stake, according to the credit firm’s website.
China should allow defaults of some wealth-management and trust products to reduce incentives for financial institutions to sell risky products and maintain stability in the financial system, Ma Jun, Deutsche Bank AG’s chief China economist, wrote in a report this week.
Trusts, along with banks’ wealth-management products and private lending among individuals, make up China’s shadow- banking system, which JPMorgan Chase & Co. estimated in May to be worth $6 trillion. The figure is equivalent to 69 percent of the nation’s 2012 gross domestic product.
China’s trust industry is now larger than the insurance and mutual fund sectors, McKinsey & Co. and Ping An Trust Co. wrote in a report in November.
The State Council, China’s Cabinet, has taken steps to rein in shadow lending, National Development and Reform Commission spokesman Li Pumin said Jan. 22, according to a briefing transcript posted on China.com.cn, a government-run website. The commission will actively participate and promote the measures, Li said, without elaborating.
The State Council imposed new controls on shadow banking that include a ban on using third parties to evade restrictions on lending directly to certain borrowers, three people familiar with the matter said this month.
--Aipeng Soo, with assistance from Zhang Dingmin and Penny Peng in Beijing and Zijing Wu in Davos, Switzerland. Editors: Darren Boey, Russell Ward