Markets are in a bit of a swoon today as the news from China emerges that one of its banks is getting ready to let one of its’ funds fall on its proverbial sword. The bigger picture suggests this may be the first in a long line of defaults as a result of China’s ill-regulated shadow banking system that is dominated by ‘trusts’ whose capitalization originates with investors seeking safe investments.
The “2010 China Credit-Credit Equals Gold #1 Collective Trust Product” (CEG) as it is known, is on the brink of default, having lent the $496 million it had collected from investors to Shanxi Zhenfu Energy Group, a coal mining company that has recently declared bankruptcy. CEG investors were promised a 10 per cent annual return on their investment, which now is impossible, since repayment of the loan and its interest has been halted by the bankruptcy of Zhenfu Energy.
And now, it’s beginning to look like China may be on the brink of bigger problems. The announcement of “Systems Maintenance” across its entire ATM network over the course of the Chinese New Year is raising red flags among certain market commentators.
According to a report in Marketwatch:
Citigroup Inc.’s China branches, and possibly other banks, have stopped all cash transfers for three days and all currency conversions from yuan for nine days, Forbes reported Sunday via an article by contributor Gordon Chang. Citi reportedly made the announcement in a notice on its web portal for Chinese customers, saying the move was a result of “system maintenance of People’s Bank of China,” a reason Forbes’s Chang described as “preposterous.” MarketWatch couldn’t immediately confirm the report. Chang said the move was similar to action taken in June and December of last year. “In June, for instance, the central bank used the excuse of a ‘system upgrade’ to allow banks to shut down their ATMs and online banking platforms. As a result, they conserved cash and thereby avoided a nationwide meltdown,” Chang wrote.
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