China Trust Asset Growth Slows Amid Shadow Banking Crackdown

Aug 12, 2014 2:21 am ET

(Updates with profits in sixth paragraph.)

Aug. 12 (Bloomberg) -- China’s trust assets expanded at the slowest pace in two years as the government cracks down on shadow banking and investors reassess the risks of the high- yield investments.

Trust companies’ assets under management climbed 6.4 percent to 12.5 trillion yuan ($2 trillion) as of June 30 from three months earlier, the China Trustee Association said in a statement yesterday. That’s the slowest growth since the first quarter of 2012 and compares with an average annual gain of 50 percent since 2008.

Premier Li Keqiang is grappling with sustaining economic growth while containing financial risks after shadow banking exploded in China from 2010. A “day of reckoning” is approaching for the trust industry with repayments to peak this quarter and next, and banks are set to bear the bulk of losses as defaults rise, Haitong International Securities Co. economist Hu Yifan wrote in a July 25 report.

“Regulators, banks and local governments are all trying to contain the trust risks but things will only really improve if the economy picks up and borrowers get back on their feet,” Zeng Yu, a Beijing-based analyst at China Securities Co., said today by phone. “Chinese investors are becoming more risk averse and increasingly will go for lower-yield but less risky products.”

Trust assets under management fell 240 billion yuan in June from May. That was the first monthly decline, the statement said, without specifying a time period.

Yield, Profit

Trust products’ average yield rose to 6.87 percent in the second quarter from 6.44 percent three months earlier, the trustee association said. The combined profits of trust companies rose 12 percent to 28.9 billion yuan in the first half from a year earlier, it said.

China averted its first trust default in January as investors in a 3 billion-yuan high-yield product issued by China Credit Trust Co. were bailed out days before it matured. The company last month delayed payments on a second product.

The banking regulator tightened rules for new trust products in April as borrowers from coal miners to developers struggled to make repayments. Li wants to aid companies and economic growth by boosting the supply of bank loans and limiting the more expensive shadow financing so that firms have lower borrowing costs.

Wealth Funds

By the end of June, 35 percent of trust assets related to financial institutions’ investments using their own funds, 34 percent to wealth-management funds and the rest to individuals with at least 1 million yuan to invest, according to yesterday’s statement.

“Trust companies are under pressure to improve risk controls after many products ran into problems in the first half and regulators flagged the risks, so they have to slow down new issuance,” said Zeng. “The growth rate of the past few years is just not sustainable.”

About half of outstanding trust assets were with industrial and commercial companies and infrastructure projects, while 11 percent were in the real-estate sector, according to the association. As property risks increase, trusts may become more cautious in directing money to that industry, the association said.

Repayment Difficulties

The association’s report showed that the 68 trust firms have net assets of only 275 billion yuan, suggesting a limited ability to shoulder any implicit guarantees for their products.

At least 15 trust products have been reported to have repayment difficulties this year, according to UBS AG, citing media accounts and company disclosures. At the same time, local governments are working to avoid defaults, brokering deals between corporates and banks and leaning on lenders to provide bridge loans or take over shadow credit, Wang Tao, chief China economist at UBS, wrote in a July 10 note.

In addition, increased bank lending -- local-currency loans in June were the highest for that month since 2009 -- new forms of shadow financing and looser liquidity have helped to prevent “high-profile shadow credit events,” Wang said. Investors’ concerns may revive next year as local governments’ finances deterioriate and the effects of a property-market downturn continue, she said.

Securities Companies

The outstanding value of wealth-management products sold by banks surged by 3.8 trillion yuan in the first five months of this year to 14 trillion yuan, according to the banking regulator. The average return on such quasi-savings products was about 4.13 percent in 2013.

Securities companies’ asset-management businesses have been bulking up, reportedly taking over some underlying assets from trust products, according to UBS.

The value of assets managed by brokerages surged 43 times in the last two years to 5.2 trillion yuan, compared with a twofold increase for trusts and a 41 percent gain for mutual funds, a May report by Securities Association of China shows. The rapid expansion in assets managed by brokerages is largely being driven by their repackaging of loans into wealth- management products, the primary business of trusts, according to consulting firm Z-Ben Advisors Ltd.