A HIGH-YIELD investment product backed by a loan to a debt-ridden coal company failed to repay investors when it matured last Friday, domestic media reported yesterday, in the latest sign of financial stress in China’s shadow bank sector.

    The product, which raised 289 million yuan (US$47.7 million) from wealthy clients of China Construction Bank (CCB), China’s second-largest lender, was created by Jilin Province Trust Co. (Jilin Trust) and backed by a loan to a coal firm, Shanxi Lianmeng Energy Co.

    “It matured Feb. 7, but CCB passed on an announcement from Jilin Trust saying ‘We currently can’t be certain when [Lianmeng] funds will be returned,’” Shanghai Securities News quoted an unnamed investor in the trust product as saying.

    Though the maturity date has already passed, producing a technical default, Jilin Trust appears to be working to recover investor funds.

    “Restructuring isn’t bankruptcy. As far as we know, there is no problem with the firm’s assets. The firm is in negotiations with investors,” the paper quoted an unnamed Jilin Trust official as saying.

    Chinese markets were on edge last month when a similar product created by China Credit Trust Co. warned investors that it might not pay off on time when it matured Jan. 31. That product was also based on a loan to an indebted coal producer in Shanxi.

    In the end, however, investors in China Credit Trust’s “Credit Equals Gold” product recovered their principal when an unnamed investor stepped in to purchase collateral assets. In this case, default has already occurred, the paper said.

    The popularity of investment trusts and other so-called wealth management products has exploded in recent years, with banks and trust firms marketing them as a high-yielding alternative to traditional bank deposits.

    Analysts warn that default risk from such off-balance-sheet loans is rising. Funds raised through the sale of these products typically flow to weak borrowers that struggle to access bank loans, especially property developers, local governments and firms in industries plagued by overcapacity.

    The fourth tranche of Jilin Trust’s product raised 289 million yuan from investors in February 2012, promising a 9.8 percent annualized return.

    The previous three tranches matured late last year without paying investors as planned. (SD-Agencies)