THE EXEMPLARY DEFAULT of a high-yielding wealth management product was always going to have to be carefully managed. The default would have to be painful enough to instruct Chinese investors that their assumption that high-yielding investments sold through state banks carry an implicit guarantee is misplaced, but not so painful that it put the shadow banking system at any sort of systemic risk that could ripple through to the mainstream financial system. With China’s trust assets increasing 46% last year to a record 10.9 trillion yuan ($1.8 trillion), it could potentially be a powerful ripple.
But the best laid plans of man, and all that…
With China Credit dodging the bullet, what appears to be the trust company fated to play the fall guy, Jilin Province Trust Co. Ltd, sold a number of high-yielding trust products through China Construction Bank, the funds raised going to a now delinquent coal company, Shanxi Liansheng Energy. Last week, state media reported that Jilin Trust had failed to pay off 763 million yuan of maturing high-yield investments it sold to China Construction Bank clients. It now appears that, according to the official China Securities News, it is just one of six trust companies who lent a total of 5 billion yuan to Shanxi Liansheng.
The concern is that their exposure could trigger similar defaults, and what was intended to be an orderly default, turns into something altogether more panicky within the shadow banking system. Beyond the inherent undesirability of that, it would put the big state-owned banks in an awkward position. They are not under a legal obligation to repay investors who bought trust products through them, but they may feel a need to do so — or be made to feel a need to do so — in order to maintain their reputations (if the pressure is from below) and uphold social stability (from above).
For now, it seems that provincial officials are working on a debt restructuring for Shanxi Liansheng to forestall things getting out of hand. The coal company was said last year to owe as much as 30 billion yuan. The restructuring discussions involve not just creditors but also the trust companies and the state owned banks. This Bystander suspects the banks will end up extending new loans to the coal company that can be used to pay off the trusts. Not at all the lesson intended. If anything, quite the reverse.