* Shanxi province may provide 50 pct of rescue funds -
* ICBC, trust firm could each provide additional 25 pct -
* Parties seek to avoid landmark shadow-bank default
* China Credit Trust in talks with potential white knight
(Recasts, adds report on possible bailout)
By Gabriel Wildau
SHANGHAI, Jan 23 A Chinese provincial government
may help bail out investors in a troubled high-yield investment
product, local media reported on Thursday, in a closely watched
case viewed as a potential landmark precedent for defaults in
China's shadow bank sector.
Shanxi province in central China, home to the struggling
coal company that received a high-interest loan through an
investment trust, may provide half of the funds necessary to
repay investors when the trust product matures on Jan. 31, the
21st Century Business Herald reported on its website on Friday,
citing an unnamed source.
China Credit Trust Co Ltd and Industrial Commercial Bank of
China may both pitch in a further 25
percent of the necessary funds, the paper reported.
ICBC, which helped market the trust product to wealthy
investors through several branches, has previously said it would
not bear the "main responsibility" for repaying investors.
A default of the 3 billion yuan ($496 million) product could
shatter the widespread assumption that off-balance-sheet
investments carry an implicit guarantee from state banks and
their partner institutions.
Regulators have warned that investors must assume the risks
from high-yielding investments and not expect protection from
losses unless such guarantees are explicit.
But local governments have largely ignored these injunctions
and have stepped in repeatedly in recent years with bailouts for
local firms facing default on corporate bonds and trust loans.
The report of a possible government rescue comes a day after
China Credit Trust reported progress in its efforts to ensure
that investors are repaid.
The firm told investors in its "Credit Equals Gold #1
Collective Trust Product" on Wednesday that it was in discussion
with new investors to raise funds necessary to pay off current
"The trustee is currently in negotiations with a certain
number of interested investors and is intensely discussing the
specific details," China Credit Trust said in a statement to
investors that was obtained by Reuters.
China Business News also reported on Thursday that the trust
company was in negotiations with an unnamed insurance company to
purchase the collateral used to secure the trust loan to Zhenfu.
The trust firm had previously told investors that it may be
unable to pay out principal and interest when the high-yield
product, which is based on a loan to a struggling coal company,
matures on Jan. 31.
China Credit Trust also told investors on Wednesday that the
coal company, Shanxi Zhenfu Energy Group Ltd, had received a key
government permit that would enable it to restart production on
one of its coal mines.
Zhenfu also resolved a property-rights dispute with
villagers over another mine, the trust said.
"The value of these two mines will now rise significantly.
Basically these two assets have been revitalised," the official
China Securities Journal quoted an unnamed trust industry
executive as saying on Thursday.
The progress on the mines could pave the way for Zhenfu or
its creditors to sell the mines in order to raise the funds
necessary to repay Zhenfu's debt, though it is unclear whether
China Credit Trust would be first in line among Zhenfu's various
When contacted by Reuters, China Credit Trust declined to
comment. ICBC's news spokesman did not immediately answer calls
($1 = 6.0513 Chinese yuan)
(Editing by Jacqueline Wong)