Rising Financial Risks in China's Coal Sector

Once again, China's financial system appears to have averted a potential crisis. China Credit Trust Co. and the Industrial and Commercial Bank of China announced Jan. 27 that they have arranged for a third-party investor to take control of a $496 million wealth management product that was expected to default Jan. 31, thus offering investors in the original product an opportunity to recoup most or all of the principal on their investment. Funds from the product had been channeled to Shanxi-based Zhenfu Energy Group, a coal mining company with a history of financial troubles and that, according to one Chinese source, is already technically bankrupt, with total assets of around $82 million.

Technical defaults on such products have thus far been contained by emergency maneuvers to repay investors, while the impact of bankruptcies in coal and other heavily indebted sectors has remained largely localized. But this has raised questions about when and how such developments might translate into a systemic failure in the nation's financial system.