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China protests highlight shadow lending problems

A wave of small protests outside banks and government offices around China in recent days has cast a spotlight on shadow lending, a sector that provides important alternative financing channels for small firms shut out of regular bank loans.

On Tuesday, a group of investors in the city of Chengdu in Sichuan province held a demonstration in front of local government buildings after one of the biggest credit-guarantee companies in Sichuan failed to step in and cover loans to small firms it had insured.

A day earlier, a few dozen investors staged protests outside Industrial & Commercial Bank of China branches in Guangzhou and Shanghai after they had been told they would need to wait at least another 15 months to get the payout on a trust-company product sold at the bank that they wanted the lender to step in to ensure payment.

Protesters carried a banner reading, "Swindler ICBC, pay back our blood-and-sweat money," outside an ICBC branch in Guangzhou. The product's prospectus didn't mention any liability for ICBC in case of default, but several investors said the bank had assured them of the product's low risks.

Neither ICBC nor the trust company responded to requests for comment.

Regulators have long sought to curb the proliferation of shadow lending on concerns of a buildup of debt. A widely anticipated wave of defaults among China's trust companies--which act as conduits by raising money to invest in assets or to make loans--has so far failed to materialize. But the protests, which follow other similar events around China in recent months, serve as a reminder of the difficulty to pin down who is responsible when something goes wrong.

The Sichuan protests illustrate the problematic role of lightly regulated credit-guarantee companies, which have become an important component on the path to loans for China's small and medium-size firms. Bank and other financial institutions typically require significant collateral, which small firms rarely have, to back a loan. But they are sometimes willing to extend credit if another company promises to pay off the loan if the borrower can't. The credit-guarantee companies give banks and other lenders peace of mind that their loans are safe, charging the borrower a small fee for the service.

An investor surnamed Gao in Chengdu said he invested 500,000 yuan ($80,600) in a small loan company late last year, with the funds then being lent out to small businesses in the province. Mr. Gao said he was promised at least 15% annualized return on his investment.

The lending was guaranteed by Huitong Credit & Guaranty Co., which said in a statement on July 15 that its chairman and other executives hadn't been seen for more than a week. Phones rang unanswered at both the company and local government offices on Thursday.

"I learned from local press that the executives [of Huitong] have run away and then I knew my investment was in danger," said Mr. Gao.

Besides small loan companies, Huitong also guaranteed loans to small firms made by trust companies and banks. It isn't clear whether those investments are also at risk.

The unclear role of banks in the sale of trust-company instruments is at the heart of the ICBC protests. The product that sparked the protests was issued by China Credit Trust Co. and attracted a total of 1.3 billion yuan ($210 million) from investors. It had required a minimum investment of at least three million yuan and promised around 10% annualized return.

The company said it would pay back investors over the coming 15 months, after selling its collateral, including several coal mines.

"ICBC managers told us the product was safe and both the principal and interests are guaranteed," said Zhang Liang, an investor in Guangzhou who attended Monday's protest. "If it wasn't sold by ICBC, we would not have bought the product since we never heard of this trust firm before," he said.


© LEHMAN, LEE & XU 2014.
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