Latest on the Trust Default; Some Chinese Investors Say No to ICBC Offer

ICBC Offers Clients Option to Recoup Funds From Trust
Rights in the 3 billion-yuan ($496 million) product issued by China Credit Trust Co. can be sold to unidentified buyers at a price equal to the value of the principal invested, according to one investor who cited an offer presented by ICBC and asked to be identified only by his surname Chen. China Credit Trust earlier said it reached an agreement for a potential investment and asked clients of ICBC, China’s biggest bank, to contact their financial advisers.
Getting the principal back is good, but failure to pay all the interest is still a failure to fulfill the contract.

This article (“诚至金开1号”违约前夜获重组) notes investors will receive interest from year 1 and year 2, which were 9.5% and 10%, but will only receive 2.8% from year 3, lowering the total yield to 7.5%, below what was promised.

This Chinese article (“诚至金开1号”解决方案出炉 剩余利息不兑付) says the customers can keep their rights, collect interest and possibly recoup their principal in time. If they take the deal, they get their principal back with reduced interest. At least one investor interviewed for the story rejected the offer as unacceptable.

The big story here was never the default. Even if the entire $500 million were lost, it would be a drop in an ocean of the Chinese financial system. What matters here is the psychology of investors. Are they going to keep buying WMPs and trust products in the wake of this default? I believe the answer is no, they will not, and that will lead to a further slowdown in credit. The only bailout that might make a difference would be a total bailout that delivered all the principal and interest to the investor. Every signal out of the government and central bank shows they want to restrain credit growth, thus a total bailout is very unlikely.

This is why I disagree with this take:

The $469 mln bailout of this investment product risks inflating China’s shadow banking bubble even more

There is a poll in the article, taken from a Chinese website, which shows 70% of respondents would not invest in WMPs if they are not guaranteed. However, all that is required to pop a credit bubble is for the growth rate to slow considerably because people assume high growth rates will continue. The failure to pay the promised rate of interest is enough to make investors look elsewhere for returns, including overseas. It is too early to tell what the effects of this will be for the overall economy, but this is a serious event not in and of itself, but because it signals the end of credit expansion, or at least the beginning of the end. Given the size of China's credit market and its rapid expansion in the past few years, the risk of a disorderly reversal of trend (a financial crisis) is high.

1 comment:

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