* No-default assumption has fuelled shadow banking's rise
* High-yield trust product matures on Jan. 31
* Default could shatter "rigid repayment" culture
* But ICBC may face pressure to shield investors from losses
(Recasts, adds banker quotes)
By Heng Xie and Gabriel Wildau
BEIJING/SHANGHAI, Jan 16 A high-yielding
investment product based on a loan to an indebted coal company
is offering the latest test of China's willingness to permit
defaults in its shadow banking system.
If the product, which is scheduled to mature on Jan. 31,
fails to pay out as promised, it could shatter the widespread
assumption that even risky investments carry implicit guarantees
from the government and state-owned banks.
Economists say China's zero-tolerance policy towards default
has distorted capital allocation, as credit flows to the firms
most able to call on a bailout if problems arise, rather than
those with the most productive businesses.
Industrial and Commercial Bank of China
, the world's largest bank by assets, said
on Thursday that it would not assume the "main responsibility"
for repaying investors in a troubled off-balance-sheet
investment product that it helped to market.
ICBC's shares have fallen this week amid speculation it
would be forced to help repay investors in a 3 billion yuan
($496 million) investment product issued by China Credit Trust
Co Ltd but marketed through an ICBC branch in central China.
"Regarding this unsubstantiated rumour, a situation
completely does not exist in which ICBC will assume the main
responsibility (for the trust product)," an ICBC spokesman told
Reuters by phone.
The bank's statement leaves unresolved the question of how
or whether investors in the product will be repaid. Industry
players say the bank is probably seeking a resolution.
"Right now China Credit Trust, the local government, and
ICBC are definitely at the state of intense negotiation, like a
chess match," said a senior banker.
"But with this kind of situation, you have to wait for
things to cool down, then deal with it. Because if you pay off
or don't pay off, there are problems either way."
Other market watchers are hoping for a default that could
shatter what insiders call the "rigid repayment culture"
surrounding trust products and other off-balance-sheet
"The background of interest-rate liberalisation is that even
financial institutions can go bust. So how can you go around
rescuing a non-government trust product?," Qiu Guanhua, bank
analyst at Guotai Junan Securities in Shanghai, told clients in
a conference call on Thursday.
Trust loans and other forms of off-balance-sheet credit have
helped fuel a rapid rise in China's corporate and
local-government debt in recent years. Analysts are also
concerned about Chinese banks' exposure to off-balance-sheet
While shadow banking products typically don't carry a formal
guarantee from the banks that help to create and sell them,
bankers worry that investors widely perceive them as carrying a
That means that banks may face pressure to shield investors
from losses in order to protect their reputations, even if they
are not legally required to do so.
Several near-misses in recent years highlighted the
pressure that banks and local governments face to shield
investors from losses.
CITIC Trust was forced to delay payment on a product linked
to a steel loan in Hubei province last year, but investors were
eventually repaid when the local government apparently stepped
A wealth management product sold through Hua Xia Bank
was able to repay investors - despite a default on
loans used to fund a pawn shops and Audi sales agent in the poor
inland province of Henan - thanks to a third-party guarantee on
The trust product sold through ICBC, called "2010 China
Credit / Credit Equals Gold #1 Collective Trust Product", used
the funds it raised from wealthy investors in 2010 to make a
loan to unlisted coal company Shanxi Zhenfu Energy Group Ltd.
ICBC served as custodian for the funds and also helped sell
the product to wealthy clients at a branch in central China's
coal-rich Shanxi province.
But in May 2012, Zhenfu Energy's vice chairman, Wang
Pingyan, was arrested for accepting deposits without a banking
Following an investigation, China Credit Trust told
investors that Zhenfu Energy had taken out high-interest
underground loans totaling 2.9 billion yuan, bringing its total
liabilities to 5.9 billion yuan and threatening its ability to
repay the trust loan.
China's coal industry has been battered by falling prices
over the last year. Several banks and trust companies are facing
losses on loans to another coal company, Liansheng Resources
($1 = 6.0460 Chinese yuan)
(Editing by Jacqueline Wong)