China's Shadow Banking Concerns Mount as Six Trusts Face Default

Six Chinese trust companies that provided finance to a struggling coal company are facing default as the maturities of their investment schemes are nearing.

Reuters citing the official China Securities News reported that six trust firms gave loans of more than 5bn yuan ($824.6m, £495.9m, €604.6m) to coal firm Shanxi Liansheng Energy Co Ltd. The trusts include Jilin Province Trust and Chang'an International Trust Shareholding.

Jilin Province Trust has already failed to repay 763m yuan to customers, who invested in the trusts high-yield products based on loans provided to Shanxi Liansheng.

The trust was backed by China Construction Bank (CCB), the country's second-largest lender, which acted as sales agent for its high-yield products. Investors are demanding repayments not only from the trust but also from CCB.

Chang'an International Trust had sold 1.2bn yuan in products linked to Liansheng affiliates that mature in the coming weeks.

The paper did not name other trusts which provided loans to the coal company that applied for debt restructuring. Liansheng had 30bn yuan in outstanding debt of all types, according to a court statement last year.

Concerns about Shadow Banking

China Credit Trust earlier reached a last-minute deal to repay investors in the 3bn high-yield product, avoiding the first high-profile default in the country's trust industry. The trust was backed by the Industrial and Commercial Bank of China (ICBC) that was also expected to have helped in the bailout.

The trust used funds raised through the investment scheme to make a loan to struggling coal company Shanxi Zhenfu Energy Group, which collapsed in 2012.

China's government praised its much-debated shadow banking system, saying it played a positive role in boosting its economy. But critics argue that it helped fuel a surge in the country's debt levels.

In addition, analysts are of the view that default risk is very high in shadow banking products, and they expect more bad news from the sector.

Shadow banking has experienced rapid growth in China in recent years, with trust assets surging 46% in 2013 to a record 10.9tn yuan. The trusts lured investors with promises of higher interest rates than official rates.

Subsequently, the trusts with the help of high-profile banks lend to companies that suffer from credit crunch amid credit tightening measures by the government.

Due to rising concerns, regulatory agencies in China are drawing up regulations to prevent financial disasters due to shadow banking.

The new regulations are expected to control off-balance sheet lending by banks and place non-bank institutions under closer scrutiny.