DEFAULTS in China’s US$1.8 trillion trust industry are triggering protests and spurring calls from legal experts for clearer rules on sales of investment products.

    Li Taishan, a customer of China Construction Bank Corp. (CCB), said a saleswoman from the lender in the northern province of Shanxi convinced him to invest 3 million yuan (US$482,000) in a trust product with a 10 percent indicated return by calling it risk-free.

    Two buyers of another failed plan, marketed by Industrial & Commercial Bank of China Ltd. (ICBC) and partially bailed out in January, said salesmen told them it was totally safe, even though documents state there is the chance of losses.

    China is cracking down on its shadow-banking industry, where finance companies lend with less transparency, as inefficient allocation of capital slows the world’s second-largest economy.

    Ni Shoubin, deputy head of the law school at Shanghai University of International Business & Economics, said China needs a better trust law, while lawyers in Hong Kong say Hong Kong’s tighter regulations could provide a model.

    “We should have a law for the trust industry that specifies rules on sales, due diligence and risk management,” said Ni. “Some bankers told clients it’s a product sold by both the bank and the trust company, which gives investors an impression that they are investing in deposits. Trust companies don’t fulfill the responsibility of monitoring and controlling risks in the investments they have made.”

    ICBC and CCB have stopped distributing trust products as the risk of defaults mount, Securities Daily reported Friday, citing bank employees it didn’t identify.

    Trust companies in China have acted as intermediaries to arrange funding by wealthy investors for industries that banks have spurned, including coal, solar energy and property.

    Documents for the two products marketed by ICBC and CCB show they had indicated annual returns of about 10 percent, triple the official deposit rate of 3 percent. They both had a minimum investment of 3 million yuan.

    China’s less-regulated shadow banking sector has ballooned to US$7.7 trillion, according to JP Morgan Chase & Co., involving the nation’s biggest banks, State-owned firms, local governments and millions of households. (SD-Agencies)