By Gabriel Wildau
SHANGHAI (Reuters) - Six Chinese trust firms have lent more than 5 billion yuan ($824.6 million) to a delinquent coal company, state media reported on Friday, raising the prospect of further defaults in China's so-called shadow banking system.
In addition, investors in a trust product already in default have pledged to seek repayment not only from the trust firm itself, but also from China Construction Bank (CCB) <601939.SS> <0939.HK>, the country's second-largest lender, which acted as sales agent for the high-yield investment products issued by Jilin Province Trust Co Ltd.
Analysts have warned of moral hazard caused by the widespread assumption among Chinese savers that even high-yielding investments carry implicit guarantees from state-owned banks. If a major default occurs, it could spark a panic in which investors abruptly stop buying such products, leading to bankruptcies among weak corporate borrowers who rely on non-bank financing to maintain their operations.
Jilin Trust has already failed to pay off 763 million yuan in maturing high-yield investments it sold to wealthy clients of CCB, state media reported this week. The products were based on loans to struggling coal firm Shanxi Liansheng Energy Co Ltd.
But exposure to Liansheng extends far beyond Jilin Trust, the official China Securities News reported on Friday. Chang'an International Trust Shareholding Co Ltd sold 1.2 billion yuan in products linked to Liansheng affiliates last March that mature in the coming weeks, according to disclosures on Chang'an Trust's website.
The paper did not name the other trust companies that lent to Liansheng, but reported that six trust firms have 5 billion yuan in exposure, citing an unnamed source.
A court in central China's coal-rich Shanxi province said last year that Liansheng had 30 billion yuan in outstanding debt of all types and had applied for debt restructuring.
Chang'an Trust's spokesman did not answer calls seeking comment on Friday morning.
'LAST DROP OF BLOOD'
Investors in the Jilin Trust product are demanding that CCB also take responsibility for compensating investors, 21st Century Business Herald reported on Friday.
Bankers have warned that China's lenders are exposed to vast swathes of loans extended by their non-bank partners and sold to bank clients as off-balance-sheet wealth management products. Though banks are not legally responsible for repaying investors in such cases, they may face pressure to do so in order to maintain their reputations and uphold social stability.
"A few days ago, we went looking for CCB. CCB's leader in Shanxi still says it's not his responsibility. In the end, if they really don't take responsibility, we'll go to CCB and fight a war to the last drop of blood," the paper quoted an unnamed product investor as saying.
Investors told the paper that all paperwork and fund transfers related to their purchase of the Jilin Trust product had occurred on CCB's premises and CCB sales staff had verbally assured investors that the product carried no risk. They also said their willingness to invest was based on their confidence in CCB as a large state-owned bank.
CCB did not immediately respond to requests seeking comment on Friday.
Shanxi provincial officials are working with Liansheng's creditors, including trusts and commercial banks, to arrange a debt restructuring, China Securities News quoted its source as saying.
That could allow trust lenders to repay their investors eventually, albeit with a delay. Technical defaults in which repayment is delayed have occurred before without sparking panic.
The local government plans to consolidate Liansheng's debt and share future cash flow among the various creditors. But a few creditor banks have so far refused to sign the restructuring agreement because it calls for them to extend new credit worth 2 billion yuan, the paper said.
($1 = 6.0636 Chinese yuan)
(Editing by Ian Geoghegan)