THIS MIGHT HAVE been the day that China saw its first high-profile trust default, but a bailout of China Credit Trust averted that undesired outcome. Under a last-minute deal struck this week, the 700 private investors in the three-year high-yield 3-billion-yuan ($500 million) trust will get their capital back but forego the final year of interest payments that remain unpaid.
This Bystander noted previously that how the potential default was resolved — whether by allowing a quick and orderly default, or by shoving it under the carpet via a provincial government bailout — would be an indication of how well the ticking time bomb of local government debt tied to the shadow banking system and its wealth management products is likely to be defused. In the event, it seems that the corner of a carpet was lifted amidst the last-minute negotiations between provincial officials and the financial institutions involved. These included the Industrial and Commercial Bank of China through whose private banking arm the product was sold, but which had said it wouldn’t stand behind the troubled loan.
A mysterious third party has acquired both the investors’ trust rights and the shares in the now defunct mining company that the trust funded, Zhenfu Energy, that had been held as collateral. This is what has let the trust pay off its 700 investors. One local press report says the unnamed white knight was backed by the state investment fund Citic. Meanwhile, Zhenfu Energy has unexpectedly got its mining license back from the Shanxi provincial government and will restart operations.
Economists at the Japanese securities firm Nomura say they have counted 28 similar deflected defaults since 2012. The evil but necessary day when a troubled Chinese wealth management product is allowed to default to show investors the real risks of such investments remains in the future. But how far in the future?