ICBC Investment Brouhaha: Crackdown Ahead?
The latest reports of unrest among some unhappy investors who bought a product that failed to deliver on promised returns through top lender ICBC (HKEx: 1398; HKEx: 601398) bodes poorly for a recent boom in similar products, hinting at a looming crackdown that could send a chill over the entire industry. I previously predicted we could see such consumer backlash, as many of the products flooding into the market promised unrealistically high returns to lure in investors. Such products may also include disclaimers saying that returns could also be lower, or that investors may even lose money. But unsophisticated Chinese investors often ignore such small-print, which will inevitably lead to howls of complaint when they don’t receive the headline returns.
The bottom line in all this is that Chinese consumers are relatively new at investing, and often don’t understand the risks involved with the complex financial products that they buy. That means they could easily become upset and protest if they think they were misled — an outcome that stability-obsessed leaders in Beijing want to avoid at any cost. Accordingly, financial regulators are increasingly likely to step in and clamp down on many of these new products now flooding into the market from not only banks, but also a wide range of top Internet companies like Alibaba and Tencent (HKEx: 700).
All that said, let’s look at the latest news involving a group of wealthy investors unhappy with their returns on a product they purchased through ICBC, China’s largest bank. This particular brouhaha has been in the headlines for a while now, and began when some ICBC customers bought a high-yield product called Credit Equals Gold, which was being offered by China Credit Trust Co. I suspect that many of those investors thought the product was actually being offered by ICBC with the implicit guarantee that they would receive the promised rate of return. Accordingly, few probably realized that ICBC was only acting as an agent to sell a product from China Credit Trust.
At one point it looked like the investors might lose all of their money after the collapse of the company responsible for repaying the debt, a coal miner in Shanxi province. But then an unnamed third-party, most likely acting under government orders, stepped in to pay off most of the money. But now in the latest twist to the story, a group of the investors have complained that the funds they received didn’t match the rate of return they were originally promised. (English article)
As a result, around 20 investors who purchased the product through ICBC branches in Shanghai, Zhejiang, Beijing and Guangdong are petitioning the lender for some 256,600 yuan ($42,300) that each believes he is still owed. The group also plans to send its demands to China’s banking regulator, the China Banking Regulatory Commission, which will undoubtedly raise alarm bells in Beijing.
If I were making the big decisions here, I would tell these greedy investors they should be thankful to get most of their money returned, since they technically should have lost all of it for making a highly risky investment choice. But I’m only an observer, and officials in Beijing are likely to be much more cautious in their approach to avoid discontent and social unrest.
Such discontent and unrest could quickly spread due to the inflated claims being made by many new products suddenly entering the market under a wide range of tie-ups between Internet companies and financial services partners. Both Alibaba and Baidu (Nasdaq: BIDU) have already come under public scrutiny for making potentially unrealistic claims, and I’m sure other smaller players may be making similar promises. Accordingly, it does seem like it’s only a matter of time before regulators step in to clamp down on the market, putting a major damper on this big new growth area being hyped by many of the big Internet companies.
Bottom line: Lingering discontent among a group of unhappy investors who believe they were misled by ICBC could raise concerns in Beijing, leading to a crackdown on the booming investment products sector.
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