ICBC Gives Investors Option to Recoup Cash in Troubled Trust

Jan 27, 2014 9:32 pm ET

(Updates with shares and CDS in the fifth paragraph.)

Jan. 28 (Bloomberg) -- 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.

Shares Rise

ICBC shares halted a three-day decline in Hong Kong trading, climbing as much as 1.3 percent today. Credit-default swaps insuring China’s debt against non-payment dropped nine basis points, the most since September, to 95.97 in New York yesterday, according to CMA prices. The swaps climbed to 104.91 on Jan. 24, the highest since Aug. 30.

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.

Soaring Assets

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.

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 issues in the system, Standard & Poor’s said in a Jan. 24 statement. An opportunity for “instilling market discipline” will have been missed, it said.

Attractive Alternative

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.

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.

Charged Fees

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.

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.”

--Jun Luo, with assistance from Helen Sun and Jack Gao in Shanghai and Steven Yang and Zhang Dingmin in Beijing. Editors: Chitra Somayaji, Russell Ward