Chinese Shadow Banks Face Major Test
China’s official bank system, which is controlled by the state, is very conservative, much as American banks were before 1980. Interest rates on bank accounts are very low, just barely above the CPI.
Rich investors seeking better returns on their money have turned to wealth management products (WMPs) created by independent firms, which promise high yields to the buyers. Paradoxically, it’s the banks which market and distribute these products to their major account holders.
Normally, the banks have stepped in when those promises fall short, but the Industrial and Commercial Bank of China (ICBC) has indicated that it may not support a WMP that was scheduled to begin payouts on Jan. 31, the last day of the Chinese lunar calendar this year.
Experts are worried that a default could tip the credit-dependent Chinese economy into chaos.
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.
According to the Financial Times, the “shadow banking” sector accounts for one-third of China’s credit economy, which in total amounts to 17.3 trillion RMB (about $3 trillion). The fund in jeopardy is only worth about $495 million, a mere drop in the bucket, but a default would threaten public trust in the banking and investment sector.
ICBC marketed a product optimistically called “2010 China Credit / Credit Equals Gold #1 Collective Trust Product,” the funds of which were to finance a coal company that is now facing bankruptcy. The first payouts were to begin at the end of this month.
The creator of the WMP, China Credit Trust Co., has promised to make partial payments to investors, but those investors will also expect some redress from ICBC.
While not specifically mentioned in the FT article, I’ve read elsewhere that the government will pressure ICBC to pay investors, to avoid a possible economic meltdown. forbes.com
Economists disagree on how much a credit crunch in China would affect the global economy.