Article content continued

ICBC has refused to step in, though Chinese media are reporting that the government of Shanxi province where the coal company was located may be preparing a bail-out. Meanwhile, holders of the dud investments have begun protesting at an ICBC branch in Shanghai.

The reason this story is getting so much attention is that in recent years China’s shadow banking sector has taken off, now holding an estimated US$1.2-trillion, up nearly three-fold from three years ago. Much of that is held by trusts, lightly regulated entities that enjoy considerably more flexibility in the way they operate than Chinese banks or insurance companies.

China’s trust industry is now bigger than the country’s insurance and mutual fund sectors and it’s one of the most important sources of funding for projects ranging from real estate and infrastructure to manufacturing, according to a report by McKinsey and Ping An Trust.

One of the reason trusts have grown so rapidly is that their products, typically offering fat returns with limited risk disclosure, have been a hit among the burgeoning ranks of China’s new rich.

The trouble is, with a slowdown in China’s economy the sector is facing a tough road ahead. “We estimate that 88% of the revenues of Chinese trust companies is at risk in the long term,” said McKinsey and Ping An.

Credit Equals Gold No. 1 Trust is only a small player but in a cooling market many worry that its failure could spark a wave of bankruptcies if investors suddenly lose their appetite for trust investments. Indeed, analysts warn that it’s not beyond the realm of possibility that the situation could evolve into a full blown credit crunch.