The last-minute bailout of a Chinese investment fund is raising questions about the stability of China's shadow banking system and the country's commitment to reforming the loosely regulated sector.
Wealthy Chinese investors had put 3 billion yuan ($500 million) into the Credit Equals Gold #1 fund that was created by the shadow bank China Credit Trust and marketed by the state-owned Industrial and Commercial Bank of China, according to
CNNMoney.
The fund was supposed to garner high yields from investments in coal mining in northern China. But the mining outfit supporting the fund collapsed when the price of coal sank. Investors who were initially promised 10 percent returns were told to expect a complete loss.
Editor’s Note: Free Video — ‘Rogue Calendar’ Could Turn 490% Profits
The fund's investors demanded the Industrial and Commercial Bank of China give them their money back because it had marketed the fund. Officials at the state bank countered that the product was not guaranteed and the bank wasn't responsible for covering the losses.
The question may have become moot when the shadow bank announced it had reached an agreement to restructure the product with the help of an unnamed third party.
Experts say China avoided an immediate crisis that could have led to a Lehman Brothers-style credit crunch.
"Looks like everyone is off the hook here," Gavin Parry, managing director of brokerage Parry International Trading Ltd. in Hong Kong, wrote in an email to
Bloomberg. "We also avert a bullet for the money markets, as rates were sure to spike on a default."
"The problem was properly handled," Yang Feng, a Beijing-based analyst at Citic Securities, China's largest brokerage, told Bloomberg. "It indicates the government still won't tolerate any ultimate default and retail investors will continue to be compensated in similar cases."
However, others say Chinese authorities missed a chance to address the underlying problem of its shadow banks, also known as trust companies, and are allowing a moral hazard to grow.
If investors don't realize their money is at risk in high-return schemes, they will continue to dump money into risky schemes, expecting the government to bail them out. Some experts worry that more defaults in the loosely regulated sector will put China's financial system at risk.
Assets managed by China's 67 trust companies soared 60 percent to $1.67 trillion in the 12 months ended in September, Bloomberg reported, citing data from the China Trustee Association.
"These bailouts further perpetuate the implicit government guarantee that investors have come to expect when they purchase financial products in China," wrote analysts at Bernstein Research, accusing Chinese officials of "kicking the can down the road, CNNMoney reported.
Editor’s Note: Free Video — ‘Rogue Calendar’ Could Turn 490% Profits
Related Stories:
© 2025 Newsmax Finance. All rights reserved.