Photo: CFP

With several high-return investment products having turned sour recently, concern is growing over the risks in China's shadow banking system.

A group of customers who bought into an investment product that they say has failed have asked Beijing Municipal Public Security Bureau for help in recuperating 1 billion yuan ($164 million), the Wall Street Journal (WSJ) reported on Wednesday.

The Beijing Municipal Public Security Bureau was not immediately available for comment by press time.

The case represents another example of troubled loans made in the shadow banking industry, which comprises trust companies, securities firms, insurers and any lending that is outside formal commercial banking channels.

The product was started in 2012 by Beijing Roll-In Investment Co, and was due to mature at the end of 2013, but investors say they haven't been paid, WSJ reported.

"I bought into the product only because it was said to be both principal and interest guaranteed," He Yujing, a Beijing resident who put in 1 million yuan in exchange for a 10 percent advertised return, was quoted as saying. "But now, not only did I not receive the promised return, but I also lost my principal."

A similar recent case involved China Credit Trust Co, which said last week that investors in a high-yield, 3 billion yuan product might not be repaid when the product matures on January 31.

The investment product, which was created by China Credit Trust Co in 2010 and sold via branches of Industrial and Commercial Bank of China (ICBC), involved a loan to Shanxi Zhenfu Energy Group, a coal produ­cer in North China's Shanxi Province.

In May 2012, Wang Pingyan, the vice chairman of Zhenfu Energy, was arrested for illegal fundraising, which had brought the company's total liabilities to 5.9 billion yuan and crippled its ability to repay the trust loan.

China's coal industry has been struggling amid falling prices over the last year, with many producers operating at a loss.

ICBC said that it would take some responsibility for the investment product that it helped to market, Shanghai Securities News reported Friday citing an ICBC official.

China Credit Trust declined to comment when reached by the Global Times on Wednesday. But later that day, the company announced that the guarantee firms for the product have gained regulatory clearance for a new mining permit, indicating that they might be able to cover the losses for investors.

Firms in China's shadow banking system raise money from investors by promising annual returns of 10 percent and above, far higher than the government-mandated 3 percent interest rate for one-year bank depo­sits.

Trust product defaults have taken place before, but investors haven't suffered losses as troubled borrowers have generally been bailed out, either by the institutions offering the product or by the government. 

More defaults loom

A default would damage the reputation of the institution responsible and make it hard for it to sell new investment products, which is why they tend to cover the losses by themselves, Zhang Taowei, a finance professor at Tsinghua University, told the Global Times on Wednesday.

Zhang estimated that more defaults could come this year, as a large part of the loans were issued in 2012 and it usually takes 16 months to two years for a trust loan to mature.

"Some regional default crisis may occur but it is not likely to lead to a systemic financial crisis," he said.

Investors buying trusts are usually high net worth individuals and financial institutions, and an impact to this group of investors is not as significant as a default that affects the general public, he said.

Trust loans worth 900 billion yuan will come due this year, up 12.5 percent from 2013, Sinolink Securities Research Institute reported on January 20, citing trust information portal use-trust.com.

The risk of default could be high for infrastructure projects, local government-affiliated companies, property development projects in smaller cities, and the mining sector.

By the end of June 2013, about 43 percent of 17.9 trillion yuan-worth of local government debt came from non-bank sources, the National Audit Office said in a report on December 30, 2013. And 11 percent of local government debt was from shadow banking lenders, the report said.

Trust loans and other forms of off-balance-sheet credit have fueled a rapid rise in China's corporate and local government debt in recent years.

China's total debt - including government, corporate and household debt - is estimated to have reached 218 percent of GDP by the end of 2013, up 87 percentage points since 2008, according to data from Fitch Ratings.

Challenges

Another major component of shadow banking activities is wealth management products (WMPs) sold by banks, which do not always provide returns that are as high as advertised.

Such products reportedly account for 10 percent of total deposits in the Chinese banking system.

Banks did not disclose return information for 40 percent of the WMPs issued last year, which indicates these products may have failed to return their promised yields, Guangzhou Daily reported on January 18.

China's efforts to rein in shadow banking activities has led to infighting between the central bank and the nation's banking regulator, WSJ reported on January 14 citing insiders.

The People's Bank of China, the central bank, which oversees financial stability, is reportedly frustrated at the China Banking Regulatory Commission for its lack of willingness to tighten regulations for banks' shadow lending, according to the report.

Meanwhile, the CBRC is concerned that tougher rules to curb shadow banking may erode banks' profit margins and restrict their ability to repay existing debts, as banks need to issue new wealth management products to repay the principal and interest on previous products, Zhang said.

On the other hand, growing shadow banking activities are channeling money out of traditional lending, which has weakened the effectiveness of the central bank's monetary policy.

The recent cash squeeze in the interbank market is a result of rising shadow banking activities, Zhang said.

Shanghai-based China Business News reported on January 6 that China's State Council has drafted a document setting out rules for a regulatory framework to manage the shadow banking industry.

The document said that shadow banking is a healthy supplement to the traditional banking system if it is well regulated, as it increases investment options for the public and provides financing for businesses.

So far there is no official data for the shadow banking industry, but it was estimated to be worth 20.5 trillion yuan by the end of 2012, according to the Chinese Academy of Social Sciences.