Last-minute deal averts default in China’s shadow banking market

HONG KONG - A high-profile case involving the repayment of a RMB3 billion (US$496 million) wealth management product (WPM) issued through a bank on behalf of the China Credit Trust Company was settled on Tuesday when funds from an “unknown” source came to the rescue. Under the arrangement, investors will reportedly recoup their principal, but may forgo some interest payments.

BBVA Bank says the case added to market jitters because of its potential impact on confidence in the shadow banking market. Regulatory authorities have been trying to curtail the build-up of fragilities in the shadow banking system, which has grown rapidly to more than 60% of GDP at present.

“They increasingly face a dilemma between avoiding moral hazard by injecting greater market discipline into the system and allowing defaults (there have been none so far), and risking undermining confidence in the broader financial system,” BBVA says.

“While outwardly sitting on the sidelines, it appears that, behind-the-scenes the authorities have sought a balance in allowing warnings to be issued to investors, but without sanctioning a full-blown default that could have been destabilising to market confidence. Given this approach, we expect banks to take losses on these products in the months ahead, which will weigh on their profits.” www.bbvaresearch.com (ATI).