News Detail

China’s banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, said two people with knowledge of the matter, signaling government concern about possible defaults. The China Banking Regulatory Commission also told its local branches to closely monitor risks from trust and wealth-management products, said the people, who asked not to be identified as the matter isn’t public. The commission issues such alerts for matters that it judges may pose significant risks to banks and not on a regular basis, the people said.

The coal industry has come under scrutiny as investors seek repayment of a 3 billion-yuan ($496 million) trust product that’s facing default because the miner that borrowed the funds collapsed. A default threatens to shake investor faith in China’s $1.67 trillion trust industry and add to challenges to the Communist Party’s ability to ensure stable growth in the world’s second-biggest economy.

The market is “quite worried” about the coal industry, Rainy Yuan, an analyst at Masterlink Securities Corp. in Shanghai, said by phone today. “Coal is a pillar industry in the economy and banks’ exposure to the sector should be quite substantial.” Shares of Industrial and Commercial Bank of China Ltd. (3988) fell as much as 1.5 percent in Hong Kong trading and were trading 0.8 percent lower at HK$4.77 as of 3:30 p.m. local time. China Shenhua Energy Co., the nation’s largest coal miner, fell as much as 1.6 percent. The city’s benchmark Hang Seng Index fell 1 percent.

Bail Out

ICBC Chairman Jiang Jianqing told CNBC in an interview from the World Economic Forum in Davos, Switzerland that the bank won’t bail out investors in the Credit Equals Gold No. 1 product that it distribute in 2011. About 20 of those investors met with ICBC officials yesterday in Shanghai demanding their money ahead of the product’s Jan. 31 maturity date.

In addition to the coal mining industry, the banking regulator also told regional offices to watch for credit risks associated with changes to China’s economic structure and overcapacity in industries, the people said. The order didn’t mention concerns that the trust product distributed by ICBC may default, they said.

The CBRC’s media office didn’t immediately respond to faxed questions seeking comment today. Analysts at Bank of America Corp. and Deutsche Bank AG are among those to say in the past week that the possibility of defaults in China is increasing as authorities take measures to rein in shadow banking and growth slows. Data this week showed economic growth slowed to 7.7 percent in the fourth quarter from 7.8 percent in the previous three-month period.

Coal prices fell 16 percent last year, according to data tracked by Bloomberg. Prices fell below the break-even point for most small and medium-sized producers, forcing them to reduce output, Helen Lau, an analyst at UOB Kay Hian Ltd. in Hong Kong who covers the coal industry, said by phone.

“As a result of output cuts, they don’t have much cash flow and thus they can’t repay loans and debt,” Lau said. “The fact that the government is giving warnings and not bailing out defaults will be good for industry consolidation, indicating it is letting the market shoulder the burden of its own risks.”

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