Chinese bank on the hook for 4 billion yuan shadow banking default

SHANGHAI, (Reuters) - An off-balance-sheet credit product default has left a small Chinese bank on the hook for 4 billion yuan (S$824 million), the latest default to hit the shadow banking sector, the official People's Daily said in a report on 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 yuan 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 per cent of the lender's 2013 net profit, it added.

Reuters was unable to immediately reach Evergrowing Bank for comment.

"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 scheme 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.

The products were due to be repaid by the shareholder and affiliated company at the end of August.

Currently, it is unclear where the 3.7 billion yuan held by the shareholder and affiliated company has gone, the paper said.

At the end of 2013, the bank's shareholder, an investment company held by a Chengdu conglomerate Mind Group, owned 267 million shares in the bank, amounting to a 3.28 per cent stake.

The bank has set up special purpose groups to investigate the risks involved.

The Shandong authorities and provincial government are also looking into the matter, the paper said.

ANZ Research estimates that China's shadow banking sector may have reached around 33 trillion yuan by mid-2014, the equivalent of around 58 per cent of 2013 gross domestic products or 20 per cent of total bank assets.

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