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Banking & Finance

Chinese shadow banking lender narrowly avoids default

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  © Reuters

SHANGHAI -- International markets breathed a sigh of relief Tuesday after China Credit Trust revealed that an unnamed party will buy a 3 billion yuan ($495 million) set of troubled investment products it manages.

     The development, coming just days before a likely default on the products, underscores the uncertainty over the future of risky, high-yield investment options offered through China's shadow banking sector. While government authorities appear to have had a hand in the deal, it is far from clear whether Beijing and provinces will continue to implicitly back such offerings through bailouts.

     The present crisis involves an investment scheme backed by loans to a struggling coal mine operator in Shanxi Province. China Credit sold the "Credit Equals Gold No. 1" investment product through the Industrial & Commercial Bank of China back in 2011.

     But Zhenfu Energy Group, the mining company, has since effectively collapsed, threatening some 700 investors with the prospect of not recovering their principal after the product matures Friday.

     Concerns over the potential shock to the Chinese financial system sent short-term interest rates soaring Jan. 20, prompting the People's Bank of China to pump funds into money markets the next day and take the unusual step of announcing the operation in advance.

     Global markets calmed Tuesday after China Credit announced that an undisclosed third party would step in and purchase the investment products at book value. Investors stand to recover their principal by the end of the month but will not recoup missed interest payments.

     Questions remain as to who would pay full value for the virtually worthless investment products -- and why.

     The Tuesday edition of Shanghai Securities News suggested that the entire deal is being negotiated according to the wishes of the Shanxi provincial government. It is indeed possible that local authorities got deeply involved, having considered Beijing's wariness of market turmoil.

     In August, Shaanxi International Trust scraped its own coffers to repay the principal of nonperforming wealth management products. But it is unclear whether investors in other shadowy offerings can expect trust companies and governments to come to their aid in the future. As analysts point out, such moves may invite further instability in the Chinese economy.

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