December 12, 2017

Growth Slows in China’s Trust Sector

SHANGHAI — The growth of the Chinese trust sector, the largest component of the country’s so-called shadow banking system, slowed markedly in the second quarter after a government clampdown on risky lending.

China’s top leaders have signaled concern over runaway credit growth and the risk of a debt crisis as local governments and companies borrow at high interest rates from nonbank lenders, and especially from trust companies.

In June, the central bank engineered a short-term cash squeeze as a warning to banks and trust companies to scale back risky lending practices.

Data published by the China Trustee Association late Monday showed that the total assets managed by the 67 trust companies in China reached a record-high 9.45 trillion renminbi, or $1.54 trillion, at the end of June.

Although that was up 8.3 percent from the end of the first quarter, growth decelerated sharply from the 16.9 percent increase seen in the first quarter. In 2012, total managed assets grew by 55.3 percent.

Controlling shadow banking is a major element in China’s campaign to shift its economic model away from its heavy reliance on debt-fueled investment.

The China Banking Regulatory Commission and other regulators have issued a slew of new rules to curb banks’ riskier operations.

Trust companies, together with other nonbank financial institutions like brokerage firms, have become a vital source of credit, allowing banks to arrange off-balance-sheet refinancing for maturing loans that riskier borrowers, like local governments, cannot repay from their internal cash flow.

The scale of trust assets still pales in comparison with total banking sector assets of more than 100 trillion renminbi as of the end of June.

Without trust companies, the banking system’s nonperforming loans ratio might be much higher, although accurate estimates are not possible.

Trust companies sell wealth management products to raise funds so they can purchase loans that banks want off their books. Such products are then marketed through bank branches as a higher-yielding alternative to traditional bank deposits.

The Chinese banking regulator recently said that outstanding bank-issued wealth-management products totaled 9.08 trillion renminbi at the end of June.

The new data on trust company assets appear to encompass about 70 percent of that total, as bank wealth-management products usually involve cooperation with a trust company.

The association data also include funds that trust companies raise by selling the products directly to investors, without being partners with banks.

The latest figures match central bank data released last month showing that new trust lending fell sharply in June, after rapid growth in January through May.

Although wealth-management products often include only spotty disclosures about underlying assets, the trust association data offer a view of where the funds are flowing.

About 26.8 percent of outstanding wealth-management funds were invested in infrastructure at the end of June, up from 25.8 percent at the end of March. Real estate accounted for 9.1 percent, down from 9.4 percent in March.

Industrial companies made up 29.4 percent of investments, up from 27.8 percent. Investment in stocks and bonds fell to 10.5 percent from 11.1 percent.

The banking regulator said the system-wide nonperforming loans ratio was 0.96 percent at the end of the first half, up only 0.01 percentage point from the end of last year.

Article source: http://www.nytimes.com/2013/08/07/business/global/growth-slows-in-chinas-trust-sector.html?partner=rss&emc=rss