When the China Credit Trust offered clients the opportunity to invest in a major coal mine project in February 2011, more than 700 investors were quick to sign up.
The project was among a slew of new investments unleashed by China in the wake of the global financial crisis, when the country launched a $586 billion stimulus of infrastructure spending and massive lending to shore up the economy.
The 700 investors were all private bank clients of China’s largest bank, the Industrial and Commercial Bank of China (ICBC), and were among an increasing number of Chinese who were looking beyond traditional financial institutions that yielded little return, bound by government-defined interest rates.
Three years on, the coal project in the northern province of Shanxi began to unravel.
Overcapacity in the steel industry and an overall slowdown in the Chinese economy had left the Shanxi Zhengfu energy group on the verge of bankruptcy, as its new projects lay idle.
Last month, the China Credit Trust looked set to default on the $500 million product, until an unnamed company stepped in and bailed out its investors, who had to settle for a 2.8 per cent return after receiving a 10 per cent return over the previous two years.
The near default of the Credit Trust has sparked concern among Chinese investors that the case may only be the tip of the iceberg. The Shanxi coal project was, after all, one of only hundreds of similar ventures that sprouted across the country post-2009.
An unprecedented expansion in the steel industry on account of easy credit enabled by the stimulus measures, and surging real estate investments that have fuelled a property bubble, have left overcapacity problems in both sectors. Worryingly, these were the two sectors that attracted the most investment over the past three years.
According to official estimates, trusts’ assets rose by 60 per cent during the third quarter of last year, reaching 10 trillion yuan ($1.65 trillion).
Data released last week by the official China Trustee Association underlined how the surging property sector has been driven in large part by financing from trusts. Remarkably, trusts provided more financing for the property sector than bank loans, according to official figures reported by the Wall Street Journal . Between October and December, trust funding of 140 billion yuan ($24.56 billion) found its way to the property sector, marking a 10-fold increase in just one year, up from 11 billion yuan ($1.81 billion). Loans from banks reached 80 billion yuan ($13.19 billion).
On Friday [last], another trust linked to a coal investment emerged to be in trouble, as a $50 million investment product offered to clients of the China Construction Bank, the country’s second biggest bank, failed to repay investors on time. The product was tied to a loan offered to another Shanxi coal company. The trust said it was unsure when clients would be paid.
Two of China’s biggest steel trading companies are also bracing themselves for lawsuits in the coming weeks over debt problems. Xiao Jiashou, known as China’s steel trading “king”, is facing 22 lawsuits from a number of banks, while Zhou Huarui, head of the Shanghai Steel Services Trade group, is facing 18 lawsuits over unpaid loans.
China’s CITIC bank had outstanding loans to steel companies amounting to 40 billion yuan ($6.6 billion) as of last year, with NPLs estimated at 8 per cent, while other major banks are also exposed by failing investments in the sector. The fate of hundreds of smaller steel companies is also tied to the two cases.
“Big steel traders guaranteed the loans of smaller steel trading firms, and sometimes traders used property as collateral to several banks at the same time,” Zhang Lin, an analyst at the Beijing Lange Steel Information Research Centre, told the Global Times . “If one of them meets problems, it is very likely to have a domino effect,” he said, leaving an uncertain few months ahead for the world’s second-largest economy.
