Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors

Jan 24, 2014 5:58 am ET

(Updates with analyst comments in eighth paragraph.)

Jan. 24 (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 on its website.

The incident will be a lesson for investors on moral hazard and risks associated with such investments, Jiang told CNBC from the World Economic Forum in Davos, Switzerland. The Beijing- based lender won’t take “rigid responsibility” for the losses and will review all its partnerships in entities with which it does business, Jiang said, according to CNBC.

Investors in the 3 billion-yuan ($496 million) Credit Equals Gold No. 1 high-yield product met with ICBC officials at a Shanghai branch yesterday to demand their money amid concern that they wouldn’t be repaid when the trust matures Jan. 31. A default on the product, which raised money for a failed coal mining company, would undermine 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, according to the China Trustee Association, even as policy makers sought to curb money flows outside the formal banking system.

Credit Equals Gold No. 1, which has a maturity of three years, indicated investors would get an annual return of 10 percent, according to information posted on the website of Beijing-based China Credit Trust Co., which structured the product to raise funds for Shanxi Zhenfu Energy Group. The coal miner collapsed after its owner Wang Pingyan was arrested in 2012 for illegally collecting deposits.

Safety Guaranteed

Individuals were asked to put at least 3 million yuan in the product with guarantees that it was “100 percent safe,” said Fang Ping, one of 20 investors who went to ICBC’s private- banking branch yesterday. The trust product was distributed by China’s biggest bank, and some investors were its own private- banking clients.

ICBC had assigned the top A ranking to China Credit Trust in 2009 under a four-step scale by which the lender rates its trust partners, according to a marketing presentation for the product that was obtained by Bloomberg News. The sales document included a page on risks attached to the coal industry, such as slower economic growth and the prospect of emission controls lowering demand for the fuel.

“We believe an outright bailout by ICBC appears beyond the bank’s options,” Liao Qiang, Beijing-based analyst at Standard & Poor’s Ratings Services, wrote in a report today. “ICBC has no legal ground to make such a bold move. Damage to its reputation from the failure of such a high-yield and high-risk product may be well manageable.”

Trusts’ Risks

According to China Banking Regulatory Commission rules, banks aren’t responsible for compensating investors for failures of the trust products they sell. Trust companies that issue the products must make clear the risks, including that there’s no guarantee of principal or minimum return, and compensate investors with their own assets in the event of mismanagement of assets or breaches of trust contracts, the regulations say. If trust companies didn’t breach contracts they will not be asked to assume responsibility for investor losses, according to the regulations.

Bank customers need to “see clearly” the risks associated with wealth-management products and other such investments, Jiang told CNBC. ICBC was a distributor of Credit Equals Gold No. 1 and didn’t offer “ironclad guarantees,” Jiang said, according to the report.

The government of Shanxi province, where Zhenfu Energy is based, may take responsibility for about 50 percent of the payments due on Credit Equals Gold No. 1, according to a report this week on the website of Guangzhou city-based Time-Weekly. Local authorities said they won’t take responsibility, and instead urged the financial institutions to prevent and diffuse the risks, the Shanxi government-controlled Yellow River News reported on its website yesterday.

--Aipeng Soo, with assistance from Zhang Dingmin in Beijing. Editors: Chitra Somayaji, Andrew Davis