The Wall Street Journal reports,"sooner or later, someone in China's trust-products universe is going to lose real money''.
''Weeks after a hasty bailout was arranged for a troubled Chinese trust product, another shadow lender, Jilin Trust, has failed to make payments on tranches of an investment product that came due over the past few months. Jilin is set to miss another payment next week. Once again the product in question is linked to a troubled coal miner, and was sold to investors by one of China's big four state banks, in this case China Construction Bank''.
The product's six tranches amount to nearly 1 billion yuan, or around $165 million, smaller than the $500 million worth of ICBC -sold products rescued last month by a mysterious third party. Trust investors in that case lost interest payments but no principal. Another shadowy resolution in which investors eventually get their principal back can't be ruled out. Jilin Trust told investors the coal company is in restructuring as it attempts to pay back debt. The final tranche matures in March.
It's also possible authorities will let investors take a bigger hit. Even if not, more distressed trust situations are inevitable and will test Beijing's resolve. Bernstein Research estimates that about 40% of the about 10 trillion yuan in trust products outstanding will mature this year. The trust companies themselves are thinly capitalized, with an equity base equivalent to 2.6% of assets under management.
It's also possible authorities will let investors take a bigger hit. Even if not, more distressed trust situations are inevitable and will test Beijing's resolve. Bernstein Research estimates that about 40% of the about 10 trillion yuan in trust products outstanding will mature this year. The trust companies themselves are thinly capitalized, with an equity base equivalent to 2.6% of assets under management.
China's big banks will be insulated so long as they can hold the line that they aren't liable for failed products that they distributed. If banks are seen to be involved in a bailout, investors will be right to question how much of this off-balance-sheet activity needs to be accounted for on the books.
In theory, China's trusts are economically useful, directing credit to dynamic companies that banks don't reach because of their bias toward serving other state-owned enterprises. In practice, trusts tend to be lenders of last resort to the least-productive sectors that the banks have been told to avoid. The China Trustee Association says 35% of trust assets are invested in the infrastructure, energy, mining and real-estate sectors. Nomura economist Zhiwei Zhang reckons the true proportion is over 50%.
The good news is Chinese investors are getting reacquainted with risk. The question is whether this can happen without sparking a broader crisis of confiden
