Chinese trust fund avoids high-profile default A Chinese fund company has avoided a high-profile default, reaching a last-minute agreement to repay investors in a soured $500m high-yield investment trust, in a case that had sent tremors through global markets. China Credit Trust, one of the country's biggest "shadow bank" institutions, raised Rmb3bn from investors three years ago for the investment, which was backed by loans to a coal miner that later collapsed. Chinese authorities, alive to the ramifications for the country's booming shadow banking sector, had been scrabbling to prevent a default. Nonetheless, investors were braced to lose their money when the fund matured at the end of January. The "Credit Equals Gold No. 1" product - a tiny slice of China's $1.2tn trust market - was sold through the private banking arm of Industrial and Commercial Bank of China to rich individuals rather than to retail punters. Trust loans, which have typically been given to higher-risk borrowers such as property developers and mining companies, make up the largest slice of China's vast shadow banking sector. With formal bank lending slowing, shadow financing rose to account for more than a third of new credit in China in 2013. The China Credit Trust product would not have been the first to fail in China, but with roughly Rmb4tn ($661bn) in trusts reaching maturity in 2014 amid tight liquidity conditions, the investment became a flashpoint for domestic and international concerns of an unravelling of the rapidly growing shadow banking sector. Those fears surfaced when ICBC, the world's biggest banks by assets, refused to repay investors in the fund, which was sold through its private banking arm. Many investors in trust products believed they were buying something with an implicit guarantee that they would be rescued if the investment went bad. Under this intense glare, China Credit announced on Monday that it had reached an agreement with an unnamed third party to sell the shares it held in Shanxi Zhenfu Energy Group, the coal miner that ran into financial trouble after its owner was arrested. China Credit had taken control of Zhenfu's shares as collateral when it failed to repay the loan. China Credit provided few details of the agreement, instructing investors to contact its client relations department. Investors who spoke to client relations said that they had been offered a deal to recoup their principal but not the remainder of their third year's worth of interest. Those who do not accept the deal will be given shares in Zhenfu, an unappealing prospect given the miner's struggles. With the product yielding 10 per cent a year, but only 3 per cent interest paid in the final year, the overall shortfall amounts to more than Rmb200m. Such losses are unusual for Chinese investors in trust products but not without precedent. UBS estimates that more than 20 trust products worth Rmb23.8bn have encountered payment difficulties since 2012. The last-minute resolution in this particular case does not spell the end of trouble for the sector. Many analysts believe that the default of a Chinese trust product is now inevitable, and may even be desirable as the country moves to improve investor perceptions of credit risk. "The underlying problem is a corporate sector insolvency issue, so there may be many more products threatening to default over time," wrote David Cui, strategist at Bank of America Merrill Lynch, in a research note. We suspect that, at a certain point, the involved parties will be either unwilling or unable to bail them out, which may trigger a credit crunch.