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Jan. 23 (Bloomberg) -- Investors in a troubled trust product distributed by Industrial & Commercial Bank of China Ltd. met with the lender’s officials at a private-banking branch in Shanghai, demanding their money amid concern of a default.
Individuals were asked to sink at least 3 million yuan ($496,000) in the 3 billion-yuan Credit Equals Gold No. 1 product amid guarantees that it was “100 percent safe,” said Fang Ping, one of 20 investors who went into the branch. The product, which comes due on Jan. 31, raised funds for a coal mining company that collapsed after its owner was arrested.
“ICBC is taking advantage of their private banking customers,” said Alex Ke, 45, before joining his fellow investors in the meeting. “We’re victims in this. This is a shocking scam.”
ICBC, the trust’s issuer and the government may bail out the product, Time-Weekly reported today. A default would 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.
China Credit Trust Co., based in Beijing, created the product, which raised funds for Shanxi Zhenfu Energy Group. 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.
Raised voices were heard periodically from inside the ICBC branch where the meeting, which started around 11:15 a.m. Shanghai time, was held. Credit Equals Goal No. 1, which has a tenure of three years, promised an expected annual return of 10 percent, according to information on China Credit’s website.
ICBC assigned China Credit the top A ranking in 2009 under a four-step scale by which the lender rates its trust partners, according to a marketing presentation for the Credit Equals Goal No. 1 product that was obtained by Bloomberg News. The presentation included a page detailing risks attached to the coal industry such as slower economic growth and the prospect of emission controls lowering coal demand.
“If they don’t settle this by Jan. 31, we’ll meet in Beijing,” Chen, a Shanghai investor aged about 50 who declined to give his full name, said before the meeting. “In Beijing, there’ll be more people. We know that investors from Guangzhou will also gather there for this.”
ICBC and China Credit may each take responsibility for 25 percent of payments for the product, while the government of Shanxi province, where the failed coal miner was based, may take responsibility for the remainder, Guangzhou city-based Time- Weekly reported on its website today.
The final version of the bailout plan may only be known next week, according to Guangzhou city-based Time-Weekly, which is owned by Guangdong Provincial Publishing Group.
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. Shanxi Zhenfu’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.
“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.
According to a CBRC rule that took effect in March 2007, trust companies should declare risks to subscribers when they set up trusts, including that there’s no guarantee of principle or minimum returns. Risks arising from management of the trust assets in accordance with trust plans are assumed by the trust assets, according to the rule.
Trust companies need to compensate losses with their own assets in the event of mismanagement of the trust assets or breach of trust plans, and investors should assume the remaining losses if trust companies’ own assets are not enough to cover the losses.
State-owned People’s Insurance Company (Group) of China Ltd. is China Credit’s largest shareholder with a 32.9 percent stake, according to the credit firm’s website.
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.
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 and Alexandra Ho, with assistance from Zhang Dingmin and Penny Peng in Beijing, Zijing Wu in Davos, Switzerland and Wenxin Fan in Shanghai. Editors: Darren Boey, Russell Ward