Good News in the Looming CCT ICBC Trust Default, But Cash Crunch Fallout Continues

Events took a turn for the better in the "Credit Equals Gold" looming default story.

China provincial govt may bail out shadow bank to avert default
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 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 latter was one of the issues mentioned in yesterday's stories: CCT has shares in Zhenfu mines, but without mining permits, the shares are nearly worthless.

Elsewhere, China Credit Trust cites progress in avoiding shadow-bank default
China Credit Trust Co Ltd, whose product could set a landmark precedent for default in China's fast-growing shadow bank sector, said it is in discussions with new investors in an effort to raise the funds necessary to pay off current investors when the high-yielding product matures on Jan. 31.

A lot of focus was placed upon the potential default of the trust, but the bigger issue remains China's credit bubble. A bailout does not help the situation, actually it signals to investors that even this small default is such a threat that the government will step in and rescue it. The situation with "Credit Equals Gold" came about because of larger trends. China is cracking down on corruption and those crackdowns will unearth shady business dealings with government officials; combined with the corruption crackdown is greater restriction on local governments ability to borrow money, which slows the economy (slower growth is better than wasted investment, but in the short-term this puts pressure on the financial system); and overall tighter monetary policy has led to a cash crunch at the end of the past three quarters.

The effects of December's cash crunch continue to spread though: China factory contraction shows weak start for economy in 2014
Weighed down by weaker domestic and export demand, the flash Markit/HSBC Purchasing Managers' Index (PM) fell to 49.6 in January from December's final reading of 50.5, dropping below the 50 line which separates expansion of activity from contraction.

The data is the first indication of sentiment in the 56.9 trillion yuan ($9.4 trillion) economy, the world's second-largest, for the new year.

"Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures," said Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong.

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