(Corrects spelling of coal firm to Liansheng, not Lianmeng)
* Jilin Trust products worth $126 million have defaulted -
* Trust products based on loan to deeply indebted coal
* Products sold through China Construction Bank
* Jilin Trust working to recover investor funds
SHANGHAI, Feb 12 A high-yield investment product
backed by a loan to a debt-ridden coal company failed to repay
investors when it matured last Friday, state media reported on
Wednesday, in the latest sign of financial stress in China's
shadow bank sector.
The product, which raised 289 million yuan ($47.7 million)
from wealthy clients of China Construction Bank (CCB)
, China's second-largest lender, was
created by Jilin Province Trust Co Ltd and backed by a loan to a
coal company, Shanxi Liansheng Energy Co Ltd.
"It matured on Feb. 7, but CCB passed on an announcement
from Jilin Trust saying 'We currently can't be certain when
(Liansheng) funds will be returned,'" the official Shanghai
Securities News quoted an unnamed investor in the trust product
Though the maturity date has already passed, producing a
technical default, Jilin Trust appears to be working to recover
"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.
Jilin did not immediately respond to requests seeking
comment on Tuesday morning.
Chinese markets were on edge last month when a similar
product created by China Credit Trust Co Ltd warned investors
that it might not pay off on time when it matured on 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 named "Songhua
River #77 Shanxi Opulent Blessing Project" raised 289 million
yuan from investors in February 2012, promising a 9.8 percent
The previous three tranches, launched in late 2011, totalled
474 million yuan and also matured late last year without paying
investors as planned. The final two tranches, amounting to a
further 209 million yuan will mature in the coming weeks, the
China's coal industry has been battered by overcapacity and
falling prices. China's bank regulator recently warned lenders
to guard against the risk of rising bad debts from the sector.
In late November, Liansheng petitioned a court in the
coal-rich central Chinese province of Shanxi for debt
restructuring. At a press conference at the time, the court said
the firm and its affiliates had financial liabilities totalling
30 billion yuan and had lost their ability to service their
Technical defaults caused by repayment delays have occurred
before, but market watchers say that China's shadow bank sector
is still waiting for a precedent-setting default in which
investors are forced to absorb substantial losses.
Such an event could shatter the widespread assumption that
even high-yielding investments carry an implicit guarantee from
state banks. But Jilin Trust is apparently still looking for
ways to recover investors' funds.
($1 = 6.0606 Chinese yuan)
(Reporting by Gabriel Wildau; Editing by Jacqueline Wong)