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June, 30, 2016

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Default on US$500 mil. China investment scheme prevented

SHANGHAI--A looming default on a US$500 million Chinese investment product sold by China's largest bank ICBC to hundreds of investors appears to have been averted days ahead of deadline, a document seen by AFP Tuesday showed.

A default by the "Credit Equals Gold #1 Trust Product" would send a shockwave through the multi-trillion dollar "shadow banking" system in the world's second-largest economy.

Industrial and Commercial Bank of China (ICBC) said last week it had no direct liability for the product, but is now processing a return of principal for investors.

Under a restructuring, ICBC is requiring investors to sign an authorization for China Credit Trust, which structured the product, to transfer their rights in it to an unidentified "prospective purchaser," a document seen by AFP showed.

They will then receive their principal back, it says — although from whom is not clear.

Wu Min, an investor who signed Tuesday, told AFP he was informed by ICBC he would have his capital back by Wednesday.

"After all, 3 million yuan is not a small number," he told AFP. "I'll take it back first and see how I can get the interest later."

ICBC staff pushed the product by promising returns of around 10 percent a year, far more than traditional deposits, investors say. It was paid in the first two years, although only 2.8 percent in the third year.

But the coal company it was supposed to fund never obtained key licenses for its activities, state media reported, and the firm that structured it, China Credit Trust, said earlier this month that it may not be able to repay 3.0 billion yuan (US$492 million) in capital due on Friday.

Analysts said earlier that the situation was a test case for cleaning up China's risky "shadow banking," a massive network of lending outside formal channels and beyond the reach of regulators, where speculative investments are rife.

The rearrangement would ease fears of a wider impact in China's financial markets, they said.

"On this particular trust case, an outright default looks likely to be avoided, and the final resolution may take months if not years, perhaps with the help of additional funding," UBS Securities economist Wang Tao wrote in a report.

"As a default will likely be avoided ... it is unlikely to be the trigger for a bigger credit event in China now."

But some investors expressed doubt over the scheme. "I won't sign the agreement," an investor surnamed Wang, who put in 3 million yuan, told AFP. "It's so confusing and we don't even know who the prospective purchaser is.

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