Major default looms in China’s huge ‘shadow banking’ system

As reported on earlier, a pre-planned ‘financial demolition’ if you will, will soon be underway and the ripple effects remain to be seen. Stay tuned.

A shockwave is looming in China’s multi trillion dollar “shadow banking” system, with an unprecedented default only days away on a $500 million investment product sold to hundreds of people.

Staff at China’s biggest bank ICBC pushed the “Credit Equals Gold #1 Trust Product” by promising returns of 10 percent a year, far more than traditional deposits, investors say.

But the coal company it was supposed to fund never obtained key licences for its activities, state media reported, and now the firm that structured it, China Credit Trust, says it may not be able to repay 3.0 billion yuan ($492 million) due on Friday.

The situation is a test case for cleaning up the risky “shadow banking” system in the world’s second-largest economy.

Analysts said the government could use a default to send a message about the danger of speculative investments, while showing Beijing’s commitment to reining in the vast pools of capital threatening financial stability.

But at the same time authorities must walk a fine balance between cracking down and preventing protests by angry investors – as well as setting off a chain reaction that sharply tightens credit in an economy where growth is already slowing.

Chinese “shadow banking” is a massive network of lending outside formal channels and beyond the reach of regulators, including activities by online finance platforms, credit guarantee companies and microcredit firms.

“For investors, this incident provides them with a case whereby they can learn lessons. In future, when they invest in wealth (management) or other products, they must see clearly the risk,” he said.

But Chinese investors have few choices on where to park their money, with low deposit rates, government controls over the property market, capital controls limiting overseas investment and one of the world’s worst-performing stock markets last year.

The combination has caused a boom in informal lending offering better returns.

Investors might still get some money back. An insurance company and an asset management firm – set up to handle banks’ bad loans – have been cited by state media as possible rescuers.

Richard Chang, a buyer who organised a gathering of investors in Shanghai, told AFP they would insist ICBC makes good any losses.

“We will never give up unless we get the money,” he said.

Full article: Major default looms in China’s huge ‘shadow banking’ system (Intellasia)

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