A Chinese baby-formula maker selling imported Australian milk to safety-conscious parents invested in the risky debt of lead, arsenic and cadmium refiners, seeking higher returns for its cash.
The uncollateralized investment, sold by a middleman known as a trust, promises to pay Ausnutria Dairy Corp. about double China’s benchmark savings rate. It’s an example of how companies are undermining government efforts to cool lending that has led to soaring property prices and inflation of 6.2 percent, near a three-year high.
Chinese trusts, investment vehicles once championed by Deng Xiaoping, are part of a shadow-banking system that now accounts for about 50 percent of all new loans in the country, according to Fitch Ratings Ltd. They gained prominence after the central bank increased the amount of deposits banks have to keep on hand, limiting what they can lend. Ausnutria is typical of businesses investing in trusts, which make loans at rates as high as 25 percent, spreading the risk of a potential credit crisis.