China's ICBC and CITIC Trust locked in spat over failed trust products

BEIJING (REUTERS) - China's biggest state-owned bank and trust company are arguing over who should be held accountable after two high-yield trust products they were both involved in failed, leaving investors owed 500 million yuan (S$108.9 million).

The spat highlights the risks to investors from China's US$7 trillion-plus shadow banking system, which is marked by opacity and lack of accountability and which Moody's Investors Service estimates amounted to 71 per cent of GDP at the end of last year.

Trust firms, with total assets of US$2.2 trillion, are also shifting more cash into this non-traditional form of financing, blunting regulators' efforts to reduce the risk.

The trust products, "Guye #1" and "Guye #2", were issued by CITIC Trust Co Ltd, run by state-owned investment firm CITIC Group Corp, and marketed and sold by Industrial and Commercial Bank of China (ICBC) , a common practice that allows banks to profit from shadow banking without taking the risk onto their books.

The product was scheduled to mature in March, but the ultimate borrower, mining and manufacturing company Shanxi Guye Industrial Group Co (Guye), was unable to make payments to investors because it was hit by China's slowing economic growth and a drop in coal demand and prices, according to a document from CITIC Trust.

Now, ICBC and CITIC Trust are arguing over which party should bear the main responsibility. Guye executives were not available to comment on the matter.

In a statement, ICBC, which sold the products to 143 clients in 2012, said it was just an intermediary and "shouldn't be responsible for repaying principle or interest, providing guarantees or solving disputes".

"The Guye trust No.1 and No.2 projects was recommended to ICBC's Shanxi branch by CITIC Trust, not vice versa," the ICBC statement said. The lender is China's largest by assets.

A CITIC Trust executive, who declined to be named, however, told Reuters that ICBC had recommended Guye to CITIC as "a strategic client" and asked CITIC to design a trust product for the company. "ICBC is passing the buck to us," Feng Weimin, CITIC Trust's trust business general manager, told reporters last week.

Investors in the Guye products, in a telephone call organised by CITIC Trust last Friday, said ICBC employees had promoted the products as "risk-free" and as jointly developed by ICBC and CITIC.

ICBC declined to comment on this matter.

The product is the second sold by ICBC branches in the central province of Shanxi that failed in the last two years. The first product, "2010 China Credit/Credit Equals Gold #1", was also issued to finance a coal company that also ran into financial trouble due to the decline in the coal industry.

Last year, ICBC said it would not repay the investors in that trust product. Local media, however, said the bank eventually stepped in under pressure from the government and the banking regulator.