AN off-balance-sheet credit product default has left a small Chinese bank on the hook for 4 billion yuan (US$652.3 million), the latest default to hit the shadow banking sector, the People’s Daily said in a report Friday.

    The default comes amid a wave of reports in domestic media on Chinese banks and brokerages struggling to make payments on shadow banking products.

    The popularity of off-balance-sheet products has exploded in recent years, with banks and trust firms marketing them as high-yielding alternatives to bank deposits, but analysts warn that the risk of defaults is rising as the world’s second-largest economy slows.

    Evergrowing Bank guaranteed the repayment of 3.7 billion yuan of principal and 300 million of interest payments under off-balance sheet products issued by one of its shareholders and an affiliated company, the paper said on its website. That sum accounts for 57.8 percent of the lender’s 2013 net profit, it added.

    “Due to liquidity issues, the enterprises cannot repay the debt, so to protect its reputation, Evergrowing Bank must, in accordance with the terms of a previously signed contract, pay compensation,” the paper said, without providing details on the source of its information.

    Evergrowing Bank set up an asset management program via a brokerage in August last year, selling products to, among others, Bank of Tianjin, Jinan Branch and Tianjin Binhai Rural Commercial Bank, the report said.

    The Bank of Tianjin paid 1 billion yuan for off-balance-sheet products, while Tianjin Binhai Rural Commercial bank paid 2.7 billion yuan in two tranches.

    ANZ Research estimates that China’s shadow banking sector may have reached around 33 trillion yuan by mid-2014, the equivalent of around 58 percent of 2013 GDP or 20 percent of total bank assets.

    Chinese trust firms are increasingly warning of possible default on wealth management products.

    (SD-Agencies)