January 17, 2014 / 6:19 AM / 6 years ago

China trust firm warns shadow bank loan may not repay-newspaper

* China Credit Trust says pay out due on Jan. 31

* Industry executives say investors may get repaid following delay

* Investors watching for precedent-setting first default

* Widespread assumption of implicit guarantee against default

SHANGHAI, Jan 17 (Reuters) - 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 other means.

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 bail outs.

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 trust loan.

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 Resources Group.

“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 Cameron-Moore

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