China races to prevent trust loan default Chinese authorities are racing to prevent the default of a soured $500m high-yield investment trust, in a closely watched test case for the country's shadow banking sector. Local media reported on Thursday that the Shanxi provincial government is considering helping fund a bailout of the trust loan after ICBC, which distributed the product through its branches, said last week it would not provide a backstop. However, Time-Weekly, a state-owned newspaper, reported that the bank - the world's biggest by assets - and the product issuer China Credit Trust will also be asked to chip in. The Rmb3bn ($500m) loan, to a now-defunct Shanxi coal mining company, is due to be repaid on January 31. When it was packaged as a trust product and sold in 2010, it promised investors a yield of 10 per cent. However, in 2012 it became clear that the company, Zhenfu Energy, was struggling for cash after the coal sector was hit hard by Beijing's efforts to reduce pollution levels across the country. The product - a tiny slice of China's $1.2tn trust market - was pitched to rich individuals rather than to retail punters. Fearful of a default, about 20 investors in the "Credit Equals Gold No. 1" trust protested on Thursday outside the Shanghai branch of ICBC's private bank, according to a report from Bloomberg. Up to now, there have been no trust loan defaults in China, despite the enormous size of the market. In 2012, trusts overtook insurance as the second biggest financial sector in the country by assets, according to a joint report from McKinsey and Ping An. They have been a key source of funding for local government infrastructure projects, property developers and manufacturers during a prolonged period of tight liquidity within China. Although a bailout could help soothe market nerves about the health of the trust sector, some analysts argue a default would help raise awareness of risk across the financial system. Many products have been bought on the assumption that even bad investments will ultimately somehow be made good. "If they allow a default [in the sector] reasonably soon, we may see a fast market reaction and quick resolution," said David Cui, China strategist at Bank of America Merrill Lynch. If the government chooses to keep kicking the can down the road then the problem will keep getting worse. More signs of stress in the sector have appeared in the past three weeks. Two other coal companies that received trust money in 2012 are also struggling to repay investors, according to Chinese state media, while another shadow banking product that invested in a Chengdu housing project has failed to repay the overdue principle on its Rmb1bn loan. More than Rmb100bn of mining-related trust products are due to be repaid this year, while a large chunk of trust money has gone into property developments across the country. Additional reporting by Gu Yu in Beijing