Banking the "shadow sector" of China stood in suspense in connection with the possible default on the investments of hundreds of private investors for a total amount of almost 500 million dollars.
The largest Bank of China ICBC actively sold to the investors shares of investment Fund called Credit Equals Gold # 1 Trust Product, the promised yield on which was supposed to be 10 percent per annum – far more than traditional deposits.
However, coal mining company, for funding which was intended to Fund, in the end never received a license to mine coal, and now the company, which was engaged in the structuring of its debt, China Credit Trust claims that may not be able to repay the value of the units for a total amount of 492 million dollars, the maturity date of which occurs this Friday.
Rescue of China Credit Trust investors is a signal that the "shadow banking system" of the second largest economy in the world requires serious cleaning. Experts believe that in order to warn the market about the dangers of speculative investment, the government can choose the path of default. It will also demonstrate the willingness of Beijing to manage the huge capital flows that threaten financial stability.
It is possible that the government may try to go for a compromise solution which would avoid, on the one hand, of a default, with other protests by angry investors, but will also prevent a chain reaction that will sharply reduce the availability of credit and an already slowing economy.
"Some representatives in the government admit the possibility of default, because it will force people to more carefully evaluate the risks of investment", — says economist of Goldman Sachs. "If large losses of some investors," he adds, will force others to stop to invest in various forms of shadow lending, in theory, it may not be the best way to affect the General condition of the credit market and thereby hurt growth".
Banking the "shadow sector" of China – an extensive network of borrowing outside of formal sources and out of reach of market regulators. This includes the activities of online financial platforms, companies that provide loan guarantees and companies engaged in microcredit.
In 2012, according to the Agency Moody's, the financial turnover of the "shadow sector" of China was estimated at 4.8 trillion dollars, which is twice the country's GDP.
There is information that the State Council of China in December issued instructions for internal use, to rein in the "shadow sector". Fitch commented: "the Reforms possible, and a good start, but there is still a very long way".
In 2010, through its subsidiaries in the Fund ICBC China Credit Trust sold the investment units of approximately 700 key customers of the Bank. The funds were raised through the Fund to Finance the company Zhenfu Energy, which was to mine coal in the heart of the coal mining region of Shanxi province. However, in 2012, the owner of the company was placed under arrest, which immediately caused doubts in the viability of the company.
"ICBC and China Credit Trust dug a hole, covered it on top of straws and told us to jump into it," complains one of the investors of the Fund, has invested nearly 500 thousand dollars of the savings of their families. "It seems that our money was never used to Finance current operations of the company. It was pure fraud, designed to lure us money and close the hole in the budget of the company," he told Agence France Presse.
At the disposal of France Press also got a copy of the letter that China Credit Trust has written to investors.
The letter said: "While there is still no certainty that the Fund will be able to convert shares into cash prior to January 31".
The quality of investment products offered by Chinese funds (there are about 65), is often compared with common in the West in 80-e years "junk bonds" — the same high returns and huge risks.
ICBC submits that it is not liable to the unitholders of the Fund. "We did not take such direct responsibility", — said the Chairman of the Board of ICBC Scsan Stanzin in an interview with CNBC.
"For investors this should be a lesson. In the future, giving their capital to the management or by purchasing a variety of products, they should clearly understand the risks," says Stanzin.
However, Chinese investors have not so great choice ways of profitable investment: the yield of deposits is low, the government monitors the property market, restrictions on the withdrawal of capital inhibit investment in foreign assets. Last year the Chinese stock market finished with the worst indicators in the world.
There are chances that investors would still be able to get some of the money back. Among the potential saviours called the insurance company and asset management, designed to work with bad Bank loans. "We're not giving up until you get the money," said one investor Richard Chan, who organized a gathering of investors in Shanghai.
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