Two days ago, we learned that the Chinese government was behind the bailout earlier this year of a trust product—a type of financial product that the central government has heretofore emphatically distanced itself from. Huarong Asset Management, using a 3 billion RMB loan from the Industrial and Commercial Bank of China (ICBC), the trust product seller, was the mystery lender behind the January bailout of the Credit Equals Gold trust product, the Financial Times reported on August 31. ICBC and Huarong Asset Management are both state-owned entities.
This is a notable event that changes the way that analysts look at shadow banking financial products. Up until this point, there appeared to be a firewall between the traditional banking system and the shadow banking sector. The China Banking Regulatory Commission (CBRC) has sternly warned the financial sector that it would not bail out non-traditional loans or other assets. In keeping with this approach, many flagging financial products were indeed not bailed out by the central government, including trust products like those sold by Jilin Trust and CITIC Trust and, more recently, mutual fund products including those sold by Shanghai Goldstate Brilliance Asset Management and Mirae Asset Huachen Fund Management Co. The central government aimed to limit its implicit backing of the financial sector.
Now, however, as a result of the Huarong fund injection, we know that the implicit guarantee in practice runs deep, especially when financial products are sold via state-owned banks.