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Industrial & Commercial Bank of China (ICBC),
the biggest state-run business bank,
issued a huge amount of financial products on behalf shadow banks.
However, those financial products issued by ICBC
came very close to default. Due to the counterparties' bankruptcy,
investors were told that they might not be able to receive
their money upon maturity date.
Nonetheless, ICBC and local governments claimed
that they weren't going to be responsible for the risks.
Even if options were made to the investors to address the problems,
the investors can only get their principal back
but lose the coupon payment.
Financial professionals predicted that a large scale of default events
is going to take place regarding the redemption of shadow banks'
trust funding products and other financial products.
In recent years, the volume of financial trust products reached
10,000 billion Chinese Yuan. Nonetheless, risks of default
for this type of financial product takes place occasionally.
Especially, the default risks have caused panics among investors
As reported, China Credit Trust Co., a shadow bank,
has sold 3 billion Chinese Yuan of financial trust products to
700 high-end customers with 10% interest, through ICBC
since 2010. The loan was made to the heavily indebted
mining company, "Shanxi Zhenfu Energy Group".
After the Bank's Associate Chairman of the Board got arrested
for illegal money gathering, the mining company also collapsed
"China Credit Trust Co." warned its investors that their investment
might not be paid off by January 31, the maturity date.
It didn't even mention anything about when the investors
can get their money back.
On January 23, Jiang Jianqing, President of ICBC claimed that
if any default takes place, ICBC is not going to compensate for it.
Jian Jianqing also said: "Financial default events are teaching
investors a good lesson so that they will better evaluate the risks
associated with their investment."
Ren Zhongdao, financial analyst in China:"When banks are selling
their products, they reinforce how financially strong
the counterparties are. There is no way that investors can get
counterparties' financial reports and investigate the corresponding
financial strength themselves. First of all, investors
lack relevant professional knowledge;
second they might not be interested.
Based on their trust in a national bank,
they listened to the ICBC's propaganda and bought their products.
When the bank was selling the products,
they could talk people's head off. But when defaults take place,
the bank just has the investors assume the risks.
The bank is actually adding fuel to the fire."
After being brushed off with all kinds of excuses,
the investors protested indignantly.
The investors said to media that China Credit Trust Co.
and ICBC dug a pit and covered the pit with some grass,
and they tempted investors to jump into it.
From the investors' point of view,
their money was not used in the operation of any companies.
It's sheer fraud. Their money has been employed
to fill up a huge financial hole.
Ren Zhongdao: "The bank must have done an evaluation
of financial strength and risk of default on the counterparties.
If the counterparties were already heavily indebted,
they definitely knew it. This type of counterparties' information
can be easily obtained. Nevertheless, China Credit Trust Co. and
ICBC still issued such a huge amount of mining industry trust fund.
It's not difficult to deduce that China Credit Trust Co. and ICBC
did all of these for their own benefit.
They totally transferred the risks to their investors."
Under intense attention, China Credit Trust Co. came up with
a problem-solving plan. They offered the investors two options:
one option is that investors sign a paper to
only get their principal back but not the last coupon payment,
about 7% of principal. Another one is that the investors
could get both principal and coupons, but the risk is that
they might even lose the principal.
China Credit Trust Co. declared that an unidentified investor
invested a sum of money and it relieved the default risk
that might take place. However, financial analysts state that
this type of risk relief methodology can send a wrong signal to the market.
That is, high-risk investment and trust funding products can survive
safe and sound. Investors would be encouraged to invest more money
in high-risk products.
Eventually, the whole financial system will be destroyed.
Ren Zhongdao: "Shadow banks' business focuses on two areas:
trust funding products and financial products.
There are more than 20,000 billion Chinese Yuan in both business areas.
The relationship among different financial products is