Pop Goes the Trust; Chinese Investors Learn the Hard Way That Credit Does Not Equal Gold

Reuters: China's ICBC says won't compensate investors in troubled shadow bank product
Industrial and Commercial Bank of China, the world's largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.

FT: Chinese shadow banks face major test
Most wealth management products are sold with some form of bank guarantee, leading many investors to believe that the products are effectively risk-free, despite the often high promised yield.

But, in an unprecedented move, ICBC has said it will not stand behind the Rmb3bn ($495m) investment product it distributed through its branches in 2010, according to people familiar with the situation. The fund matures at the end of this month.
Zhang Zhiwei, China economist at Nomura, said that a default in the shadow banking sector could trigger a ripple effect across the whole financial system.

The Chinese name of the product is 2010年中诚•诚至金开1号集合信, shortened to the very succinct: 诚至金开1号 in the press. It translates as: 2010 China Credit / Credit Equals Gold #1 Collective Trust Product.

Chinese coverage, Google Translated. More below.

January 31, the day of the Lunar New Year's Day of the Horse. However, the "honest to the gold No. 1" investor trust, but then this would have been filled with festive day filled with panic. Because this day is to honor the deadline, "honest to gold No. 1" Trust. The products issued by China Credit Trust from time to honor the last only 14 days, but there is simply unable to meet the financing side.

Statistics show that the payment of principal of the trust only reached 30 billion yuan, with earnings not paid, totaling at least 33 billion. Yesterday evening, the Trustee of the Trust realized announcement that there is uncertainty in the January 31, which adds to investor panic.

Left little time away from the payment deadline, while Credit Trust and agency side ICBCAttitude is still not clear.

Uncertainties exist settlement schedule

Credit Trust in the fourth quarter of 2013 the trust management report, the duration of the trust will expire on January 31, and in view of the king in the lock, Wang Pingyan, Shanxi amplitudes Energy Group Limited ("the amplitudes energy") fails to pay the full cost of maintaining equity, nor equity transfer price paid by notification in advance, the White House hilly coal mine consolidation program has not yet been approved, the trust property realized there is uncertainty on January 31.

Trust plan shows "sincerity to open on the 1st of gold" was established in February 1, 2011, issued by China Credit Trust, two of the funds raised 3.03 billion yuan, the period of 36 months, the annual yield from 9.5 to 11% funds for energy amplitudes equity investment, equity investment by the amplitudes Energy will purchase price paid for coal, technological inputs, coal washing plant construction, resource cost and other expenses approved by the Trustee.

Back in May 2012, to honor the crisis has erupted. Amplitudes energy Wong actual control locks, Wang Pingyan long involved in loan-sharking and his son, when on May 11, Vice Chairman Wang Pingyan energy amplitudes on suspicion of illegal deposits from the public, i.e. day filing criminal detention.

Accordance with the contract, CCT should be before 31 December each year, then assigned to the priority beneficiaries of the trust net income, revenue sources for the amplitudes of energy dividends, proceeds from the disposal of equity holdings, equity maintenance fees, repo deposits.

According to the investor presentation, the yield is calculated according to the above, the amplitude of the energy payments to investors totaling income of about 10 million, but with Wang Pingyan behind bars, shut down the mine, from the first half of 2012, for failure to pay normal income. "I figured that last year only about 3 percent of revenue, and some people may be lower." He said.

"Now the main problem is that the principal can not be cashed." Shenzhen, one investor said, compared to the principal, to get the return on investment is of secondary importance.

It is understood that, although called equity investment trusts, but "honest to the gold No. 1" is actually debt investments. Under the agreement, energy amplitudes in October 2013 should be to repurchase a total margin deposit escrow account the amount of money agreed to repurchase trust schemes, namely payment to investors. The report shows that as of last December 31, amplitudes energy use trust fund has accumulated 3.03 billion yuan. The account balance remaining 5.66 million yuan, according to the notification nor the equity transfer price to pay in advance. Plus about 10 billion revenue, energy amplitudes pay totaling about 40 million, excluding part paid, currently there are more than 3.3 billion yuan funding gap, which made investors full of panic.

Credit Trust, said the report period, held a special meeting to discuss energy and amplitudes financing risks associated with the company to resolve issues and coordinate with the relevant departments, but there is no progress. Will continue to actively promote the settlement of relevant issues in the legal and regulatory framework, does not exclude the right to claim through litigation related entities.

Silver Letter Game

Payment deadline is approaching, but the attitude of the relevant parties are still unknown, which makes investors more anxious. The silver letters behind the game, to make things even more complicated.

"Prudential's payment capacity is relatively strong, but this is mainly too large, and who knows Prudential willing to reveal all the details, but behind the existence of the game." An investor in Shenzhen "First Financial Daily" said.

According to a report published in December last year, Shanghai Jiaotong University, and the payment capacity, CITIC Trust, CR SZITIC other five trust companies in the country ranked in the top five, while the CCT is also impressively. Report shows that China Credit Trust in 2012 with registered capital of 2.457 billion yuan, the total assets of 11.6 billion yuan. If the final payment rigidity, high pressure can be imagined.

Shenzhen investors above the reporter that if payment is not scheduled, they will have to bear the main responsibility for ICBC, ICBC they are mostly private banking customers, "Cheng to open on the 1st of gold" is also available through the bank's private banking division. ICBC had also bought a consignment of trust products, not only the payment schedule, and a good income. Even when the instructions are not carefully look out of the trust the bank, where he bought "Jin Cheng to open on the 1st."

He said that in the back of the project, may be a novelty. Amplitudes Energy Trust ICBC financing project was originally asked to recommend to the faith, which was not very willing to take over, and later launched the product. This means that, just as the CCT ICBC channel appears. After the crisis, the bank considers itself as the consignment side and the custodian bank, not directly involved in the project, should not bear the responsibility; while Credit Trust believes that the project comes from ICBC, ICBC should bear the primary responsibility.

And now, "Kim Cheng to open on the 1st," There is no doubt the absence of risk control. Before amplitudes energy intervention, the White House hilly coal mine for many years has been involved in property disputes, after it has been outstanding.

These investors said, everyone knows that the investment risk, but the key is that "honest to Gold No. 1" due diligence, risk control, etc. There are serious problems.

Investment person, due to the January 31 deadline approaching, and the amplitudes of energy cashing hopeless, ICBC Credit Trust has planned and implemented by the same proportion rigid payment. People close to the CCT, also known as ICBC could own pocket payment, but has yet to formally process the results.

However, the above statement and ICBC will contribute cashing matter, and failed to get ICBC and China Credit Trust have confirmed. Yesterday, reporters call the CCT website leave contact phone number, its staff said the matter will need to contact the customer service department, and called the customer service hotline can not divert. The general manager of ICBC private banking division Ma Jian then said the reporter, is currently looking into the matter and Credit Trust actively communicate aspects of treatment, but he declined to disclose details, just said everything in CCT announcement. Reveal all the details of the trip or not, nor to disclose any of the contents.
This article mentioned ICBC as having responsibility, but ICBC says it will not bailout customers.

The firm at the heart of this busted trust is Zhenfa Energy. The tycoon at the center was the subject of a post last month: How The Credit Boom Ends: Chinese Tycoon Who Threw Lavish Wedding Sees Firm Go Bust. The stories linked in that article mention the risk to trust products.

Related posts: China's Financial Crisis Began in June; PBOC Must Pump More or Deflation Will Return
China on the Verge of Major Financial Crisis

The failure of this product could be an isolated event, but it it reminiscent of the failures seen in early 2008. Remember New Trouble in Auction-Rate Securities?
SOME well-heeled investors got a big jolt from Goldman Sachs this week: Goldman, the most celebrated bank on Wall Street, refused to let them withdraw money from investments that they had considered as safe as cash.

The investments at issue are so-called auction-rate securities, instruments at the center of the latest squeeze in the credit markets.

...“Investors have lost confidence in the liquidity of these instruments,” said G. David MacEwen, the chief investment officer for fixed income at American Century Investments, a mutual fund company. “These types of instruments depend on new investors showing up to own the securities.
And that's the way the bubble bursts.

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