Saturday, February 01, 2014

Biggest Default of Chinese Trust Investment Coming

INVESTORS in financial markets are often spooked by new revelations; in China they seem surprised by old ones. Earlier last month Chinese newspapers reported that a 3 billion-yuan ($490m) investment product, roughly translated as Credit Equals Gold No.1, might default on January 31st, when it was due to mature. The product was issued three years ago by China Credit Trust (CCT), one of the country’s biggest “trust” companies—lenders that are not licensed to raise deposits. It raised money for a mining venture, Zhenfu Energy, advertising annual returns of about 10%, and was distributed to wealthy investors by ICBC, China’s biggest bank. It was not the first trust product to get into trouble: over 20 have reportedly missed interest payments and at least one product has shaved a little off the principal. But it promised to be the biggest default so far.

Some analysts looked forward to such a failure, which would remind investors that they could not earn 10% returns without risk. Even some of the better-run trust companies privately welcomed the prospect, says Jason Bedford, a former auditor with a big accountancy firm. Their competitive edge lies in their ability to judge creditworthiness and limit financial hazards. But investors will not appreciate good risk-management if they do not recognise risk.

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