Shadow financing charted in China; At least 50% of the debt on smaller developer balance sheets would be from trust financing, funding construction at initial stages which puts the company and the trust at redemption risk

Shadow financing charted in China, and a property catch-up

David Keohane

| Jul 11 11:18 | 10 comments | Share



You’ll note that real estate is where a significant amount of the credit apparently flows and thus quite a bit of the risk resides — property developers, particularly the small ones, have had to go begging to trust companies and underground lenders at interest rates usually in the low to mid teens and for something like 6 months to two years. The duration mismatch is pretty obvious.The property market has benefited from relatively easy refinancing in the shadow market which has kept the liability mismatch as an ironically distant fear — particularly as property prices rose, and shadow banking products such as WMPs and trust companies were assumed to benefit from a state guarantee.

China’s powers-that-be deigning to notice that a load of credit growth was happening outside of their control — Shibor has come back in since kicking up to 13 per cent or so but their message stands — changes that and has quite a few people spooked.

The actual impact of shadow financing of real estate also supports and drives other sectors dependent on housing. As CreditSights said, it’s no real surprise that shadow lending practices have mostly sprouted about in large Tier I/II cities, which have seen rapidly rising prices.


From CS again (our emphasis):

The consensus is that at least 50% of the debt on smaller developer balance sheets would be from trust financing. What worries us more is that much of this is funding construction at even initial stages, which automatically puts the company and the trust company at redemption risk. There have not been any defaults or evidence of stress so fa, but then again, issuance has been surging. The suggestion that issuance will continue to surge as real estate demand and prices keep rising is probably correct, but certainly not comforting…

A basic run through the balance sheet of 127 property developers listed on the Shanghai Stock Exchange reveals that short term debt is on average 40-50% of their total debts, and cast rarely ever covers these commitments. If banks start to play hard-ball as the PBOC may want them to, or more worryingly, if trust funding is a big component of their debts (as is suggested) and if issuance retreats, then refinancing pressure would increase. Clearly, much depends on regulatory action/ inaction.

As Michael Pettis said near the end of June, “the PBoC has almost no experience of any kind of financial market condition except that of soaring money creation and credit expansion. Until last year they have never had to deal with a stable or even contracting money supply, and consequently they have had little experience in dealing with these kinds of conditions.” Simply the fact that the PBOC is looking at this market is enough to warrant caution.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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