China trust firm warns of possible default on wealth management product -report

Tue Jul 1, 2014 4:02am EDT

Related Topics

* Investors told a product backed by loans to coal company at risk - state-owned paper

* China Credit Trust had a similar issue earlier, investors' principal was paid

* Coal sector an increasing source of debt-risk for lenders

SHANGHAI, July 1 (Reuters) - A Chinese trust firm has warned that one of its high yield investment products may have trouble making payments on time, a state-owned newspaper reported on Tuesday, the latest possible default to hit the country's shadow banking system.

China Credit Trust Co Ltd's "Credit Equals Gold #2" wealth management product (WMP), which raised 1.3 billion yuan ($209.62 million) from investors in 2011, may face difficulties repaying them when the product matures on July 25, the China Securities Journal reported, citing a statement by the company to investors.

The "Credit Equals Gold #2" product is running into financial problems because a coal miner in northern Shanxi province has not been making fee payments since the second quarter of last year, the media report said.

An official at China Credit Trust declined to comment when contacted by Reuters, and the statement cited by the China Securities Journal was not publicly available.

This case written about in China Securities Journal would be the second such faced by a China Credit Trust product that made loans to coal companies.

Earlier this year, China Credit Trust warned about a possible default on a similar product - "Credit Equals Gold #1" - facing a similar situation. But in that case, investors recovered their principal when an unnamed investor stepped in to purchase collateral assets.

In February, a high-yield investment product sold by Jilin Province Trust Company to wealthy clients of China Construction Bank failed to repay investors when it matured, due to trouble the fund had getting repaid on a loan to a Shanxi coal company.

The popularity of investment trusts and other so-called wealth management products has exploded in recent years, with banks and trust firms marketing them as a high-yielding alternatives to traditional bank deposits.

Analysts warn that the risk of defaults from such off-balance-sheet loans is rising. Funds raised through the sale of these products typically flow to weaker borrowers that struggle to access bank loans, especially property developers, local government financing vehicles and firms in industries plagued by overcapacity.

The coal sector has proven a particular problem, having borrowed heavily from other companies using structures such as entrusted loans and guarantees.

China's Shanxi Coal International Energy Group, one of China's largest producers, said on Thursday it was suing a cluster of companies associated with alleged metals financing fraud at Qingdao port and its parent for more than $177 million in missed payments that had been guaranteed. ($1 = 6.2017 Chinese Yuan Renminbi) (Reporting by Shanghai Newsroom; Editing by Kazunori Takada, Pete Sweeney and Richard Borsuk)

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