* Trust firm says agreement reached with investors
* Precedent-setting shadow bank default apparently averted
* Shanxi province govt may have contributed to bailout
* Analysts say major shadow-bank default a matter of time
(Adds magazine reports on repayment terms, and background)
By Gabriel Wildau and Heng Xie
SHANGHAI, Jan 27 A Chinese trust firm said on
Monday it had reached an agreement to resolve a troubled high
yield investment product, just days away from what could have
been a precedent setting default in China's shadow banking
The 3 billion yuan ($496 million) product, based on a loan
to a struggling unlisted coal company which has since collapsed,
was due to mature on Jan. 31.
The product was created by China Credit Trust Co Ltd and
sold to wealthy investors through branches of Industrial and
Commercial Bank of China , the world's
largest bank by assets.
In a notification to investors, obtained by Reuters, the
trust firm declared that an accord had been reached and advised
investors to contact client managers, but the document, did not
say how or when investors would be repaid.
"Currently, the trustee has reached an agreement with
investors," China Credit Trust said.
Citing an unnamed investor in the trust product, Caixin, a
respected financial magazine, reported on Monday that the
agreement allows investors to recover their invested principal,
but not the final interest payment originally promised.
Local media had previously reported that the government of
central China's Shanxi province was likely to contribute 50
percent of the cost of bailing out investors in the product,
called "Credit Equals Gold #1", while ICBC and China Credit
Trust would each pitch in 25 percent.
ICBC declined to comment on Monday afternoon. A client
manager for China Credit Trust said that the firm would only
provide information to investors.
A default could have shattered the widespread perception
that even high-yielding investment schemes enjoy an implicit
guarantee from state banks and the partner institutions.
Market watchers say that could have led shadow-bank lenders
to cut credit to property developers, local governments, and
other weak borrowers who have relied on trust loans and other
forms of off-balance-sheet borrowing to stay liquid in recent
Trust loans accounted for 11 percent of corporate
fundraising in 2013, compared to 55 percent for bank loans and
10 percent for corporate bonds, central bank data shows.
Analysts say potential remains for default in China's murky
shadow banking system.
"We think this is a systemic problem. If various local
governments keep bailing out defaults, the moral hazard, i.e.
that there is an implicit government guarantee on debt that's
big enough ... will keep getting strengthened," David Cui, China
equity strategist with Bank of America-Merrill Lynch in Hong
Kong, wrote in a note to clients on Monday.
"It's difficult to imagine that the central government will
allow this to carry on much longer."
If the Shanxi government did contribute funds to bail out
trust investors, it would mark the latest case in which a local
government intervened to prevent default, including by non-state
A Shanghai district government intervened in January last
year to prevent a bond default by Shanghai Chaori Solar Energy
Science and Technology Co..
In July 2012, a local government in Jiangxi province
announced it would use taxpayer funds to repay the trust loans
of LDK Solar, a U.S.-listed solar equipment
In April 2012, a municipal government in Shandong province
appeared to step in to prevent default by Shandong Helon Co.
Ltd., a textile firm.
($1 = 6.0488 Chinese yuan)
(Reporting by Gabriel Wildau; Editing by Simon Cameron-Moore)