Default risks will not cause financial turbulence: experts

As the default crisis that affected several Chinese trust companies triggered worries over possible "financial turbulence," experts say a crisis is unlikely, and credit risks can be avoided by improving the regulatory system.

In a latest case, Jilin Province Trust, which raised 1 billion yuan (162.5 million U.S. dollars) to invest in a private coal miner in north China's Shanxi Province, told its clients that it had no repayment timetable as the debtor itself is mired in debt.[Special coverage]

The trust company missed payments for five tranches. The sixth is due to mature on March 11.

Chinese markets were on edge in January when a similar product created by China Credit Trust Co. warned investors that it might not pay on time when it matured on Jan. 31. That product was based on a 3 billion yuan loan to another indebted coal producer in Shanxi.

In the end, investors in China Credit Trust's "Credit Equals Gold" product recovered their principal when an unnamed investor stepped in to purchase collateral assets. But the interest is yet to be paid.

According to the Bank of America Merrill Lynch, China has about 660 billion U.S. dollars of trust loans due for repayment or refinancing this year. If the financial system incurs any credit risks, the Chinese economy will face a blurry outlook.

Shadow banking has grown rapidly in recent years as many small and medium-sized enterprises have had difficulties in financing.

China's trust assets reached 10.91 trillion yuan by the end of 2013, increasing 46 percent year on year. The industry made a profit of 56.86 billion yuan, up 28.82 percent from the previous year, said Zhou Xiaoming, a China Trustee Association director.

Behind the rapid development, risks are building. However, economists say the shadow banking system is controllable and the credit risks will not trigger a financial crisis.

"The overall fiscal conditions of China are healthy and there is ample monetary supply, so the individual default risks are unlikely to cause wide-ranging financial turbulence," said Ding Zhaoyong, an associate professor of finance at Jilin University in northeast China's Jilin Province.

Zhou Xiaochuan, governor of the People's Bank of China, said on Feb. 24 that China's shadow banking had grown rapidly but was still not big.

He said the country was handling the issue.

The government has placed effective supervision on shadow banks based on lessons drawn from international experience, Zhou said during the G20 meeting for central bank governors and finance ministers.

Sun Zhiming, head of the economic research institute of Jilin Academy of Social Sciences, said since the beginning of the year, the central bank has established a liquidity management mechanism which has helped stabilize market expectation.

At the same time, regulatory departments have strengthened supervision over shadow banks and interbank business, which have helped guide financial institutions to improve their liquidity management, he said.

Analysts say the annual sessions of the National People's Congress and the National Committee of the Chinese People's Political Consultative Conference would discuss reforms in various areas, including financial.

Zhang Yuewen, a researcher with the Chinese Academy of Social Sciences, said establishing an effective and market-oriented credit management system through a comprehensive and systematic financial reform could help reduce the risks in the shadow banking system.