Over the weekend, China announced sure signs of stabilising with a 7.7% growth rate, matching it’s performance for 2012, along with an announcement that the People’s Republic has finally passed the US as the world’s number producer. But that celebration was short-live…
Fears of a ‘major default contagion’, due to hit on January 31st – have already begun to cascade, as Shanghai stock market closed today at lowest level since last July.
It’s China’s first major ‘shadow banking’ default event, and investors on the bad end of the default were expecting that someone would bail them out, but that’s not looking very likely right now. Reuters reports:
“Industrial and Commercial Bank of China, the world’s largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.”
The Chinese Ministry of Finance is keen to reform a potentially chaotic trend towards shady money, and thus may use this collapse to send a message to other players that it will not encourage the dodgy shadow banking shell game, and let it fail. In short, the doctor will be administering ‘bad medicine’ to the patient – unlike in America and Europe, where elite gamblers operate under the expectation that a bailout is all but guaranteed should the ponzi scheme collapse.
What does this mean for the rest of the world markets?
It may deliver a short-term hit to the Yuan, shock pan-Asian investor confidence, and scare away some big speculators for a period of time. Whether the ripple effect hits the west remains to be seen, and won’t be seen overnight.
This will be a big test for China’s economy and financial management, and whether or not this collapse in Trust’ causes a chain reaction. Zero Hedge explains the root of the problem facing Chinese investors who’ve bought into Chinese wealth management products (WMP) right now:
A major test for the Chinese economy, and may hit their inflated property market hard, as well as the Yuan – but if they take the hit and recover without kicking the can down the road like the US Fed have done, over and over, then it will help China achieve an even stronger credit rating, but only after the dust clears.
Gold bugs sit and wait too, to see how bullion markets react to this…
Mega Default in China Scheduled for Jan 31st
On Friday, Chinese state media reported that China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products matures on January 31, the first day of the Year of the Horse.
The Industrial and Commercial Bank of China sold the China Credit Trust product to its customers in inland Shanxi province. This bank, the world’s largest by assets, on Thursday suggested it will not compensate investors, stating in a phone interview with Reuters that “a situation completely does not exist in which ICBC will assume the main responsibility.”
There should be no mystery why this investment, known as “2010 China Credit-Credit Equals Gold #1 Collective Trust Product,” is on the verge of default. China Credit Trust loaned the proceeds from sales of the 3.03 billion-yuan ($496.2 million) product to unlisted Shanxi Zhenfu Energy Group, a coal miner. The coal company probably is paying something like 12% for the money because Credit Equals Gold promised a 10% annual return to investors—more than three times current bank deposit rates—and China Credit Trust undoubtedly took a hefty cut of the interest.
Zhenfu was undoubtedly desperate for money. One of its vice chairmen was arrested in May 2012 for taking deposits without a banking license, undoubtedly trying to raise funds through unconventional channels. In any event, the company was permitted to borrow long after it should have been stopped—reports indicate that it had accumulated 5.9 billion yuan in obligations. Zhenfu, according to one Chinese newspaper account, has already been declared bankrupt with assets of less than 500 million yuan.
Continue story at Forbes
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