New default woes for China Credit Trust

Investors become cautious about the market, industry index indicates

A 1.3 billion yuan ($209.68 million) trust product has delayed repayments, pointing to the deteriorating health of China's trust industry, which is scheduled to repay investors more than 250 billion yuan in the remaining months of the year.

The Beijing-based China Credit Trust Co Ltd delayed payments on a trust product backed by coal-mining assets after it failed to raise funds to repay investors. The trust repayment was scheduled to occur on Friday, but there was only 61,538 yuan left in the trust as of the end of June, according to the trust's disclosure to its investors.

China Credit Trust has promised to liquidate assets under the trust within 15 months to repay investors, according to a statement on Thursday.

It is the second default by China Credit Trust this year. In January, a 3 billion yuan trust product sold by the company failed to pay part of the interest due to investors.

China Credit Trust is a leader among the nation's 68 trust companies. It oversaw 357.2 billion yuan in trust assets as of Dec 31, 2013 and reported a profit of 1.85 billion yuan last year.

Trust investments, especially those in infrastructure and property, are getting riskier as many projects are finding it hard to maintain positive cash flows amid the economy's deceleration.

Trust products worth more than 250 billion yuan will mature during the rest of the year, according to data from Hithink RoyalFlush Information Network Co Ltd, a financial information provider. In December alone, 456 trust products are expected to mature.

Only 52 percent of trust products had no problem raising funds in June, according to a trust industry index compiled by Use Trust Studio, a trust industry monitor, showing that investors are becoming cautious about investing in trusts.

In a July 10 note, UBS AG compiled a list of 15 trust products that have had repayment problems this year, based on media accounts and company disclosures.

Wang Tao, an economist with UBS, wrote in the note that while government intervention and a pickup in banking lending and liquidity levels have helped avoid large-scale defaults so far, she still sees the risk of trust defaults sending a ripple effect through the credit system, prompting a credit crunch and sizable losses for certain institutions.

"It is still surprising that not more defaults have happened by now," she wrote. "As local governments' financial situations deteriorate going into 2015, market concerns for an explosion of shadow credit defaults may yet revive."

Credit Equals Gold No 2 was created in July 2011 to fund mining projects for Shanxi New North Group Co, a coal company based in the northern Chinese province of Shanxi. The trust is fully collateralized by multiple mining rights.

The Shanghai Securities Journal reported that there is a dispute over one item of collateral, the 100 percent stake in a certain mining company, which the company used to get 200 million yuan financing. The case is currently being heard by a court in Beijing.

China Credit Trust's biggest investor is People's Insurance Co (Group) of China Ltd, which owns a 33 percent stake, according to the trust firm's website.

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