* China Credit Trust says pay out due on Jan. 31
* Industry executives say investors may get repaid following
* Investors watching for precedent-setting first default
* Widespread assumption of implicit guarantee against
SHANGHAI, Jan 17 The trust firm responsible for
a troubled high-yield investment product sold through China's
largest banks has warned investors they may not be repaid when
the 3 billion-yuan ($496 million)product matures on Jan. 31,
state media reported on Friday.
Investors are closely watching the case to see if it will
shatter assumptions that the government and state-owned banks
will always protect investors from losses on risky
off-balance-sheet investment products sold through a murky
shadow banking system.
Based on a loan to an unlisted coal company, the now
distressed product was created by China Credit Trust Co Ltd,
while Industrial and Commercial Bank of China
, the world's largest bank by assets, helped to market
it to wealthy investors in central Shanxi province.
On Friday, the official China Securities Journal reported
that the trust company is considering legal action to press
related parties for repayment to protect investors' interests.
The newspaper went on to quote trust industry sources saying
an outright default was likely to be avoided simply by delaying
repayment until arrangements were made to repay investors by
ICBC, which marketed the product without providing any
formal guarantee against default, said on Thursday that it would
not bear the "main responsibility" for repaying investors.
China has not suffered a large-scale public default as yet
because local governments and state banks have stepped in with
Last year, trust loans accounted for 11 percent of overall
corporate fundraising, central bank data shows, and a default
could spark a domino effect if investors lost confidence.
A sudden pullback in financing from trusts and other wealth
management products would hurt weak borrowers like local
governments and real estate developers, who struggle to access
traditional bank loans.
Alarm bells first rang over the trust loan to Shanxi Zhenfu
Energy Group Ltd when a vice chairman of the coal company was
arrested for accepting deposits without a banking licence.
China Credit Trust last year warned investors that Shanxi
Zhenfu Energy Group Ltd. 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
China's coal industry has been battered by falling prices
over the last year. Several other banks and trust companies are
facing losses on loans to another coal company, Liansheng
"Mining-related trust products are relatively large-scale,
and they now face potential crisis because of the weakness of
the coal market," the China Securities Journal quoted an
executive at a unnamed trust firm as saying.
"However, these trust products are usually developed
cooperatively by banks and trust firms, with a relatively high
ability to resolve risk," the executive was quoted as saying.
"Even if an individual product has trouble, banks will help
actively, and there is room to ease liquidity problems."
($1 = 6.0460 Chinese yuan)
(Reporting by Lu Jianxin and Gabriel Wildau; Editing by Simon