Growth in China trust assets slows as shadow banking crackdown bites

Growth in China trust assets slows as shadow banking crackdown bites

1:05am EDT

By Gabriel Wildau and Lu Jianxin

SHANGHAI (Reuters) – Growth of China’s 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 being sparked by local governments and firms borrowing at high interest rates from non-bank lenders, especially trust companies.In June, the central bank engineered a short-term cash squeeze as a warning to banks and trusts to scale back risky lending practices.

Data published by China Trustee Association late on Monday showed total assets managed by China’s 67 trust firms reached a record-high 9.45 trillion yuan ($1.54 trillion) by the end of the second quarter.

While that was up 8.3 percent from the end of the first quarter, growth decelerated sharply from the 16.9-percent rise seen in the first quarter. In 2012, total assets managed grew by an explosive 55.3 percent.

Reining in shadow banking is a key element in the leadership’s campaign to shift the country’s growth model away from its heavy reliance on debt-fueled investment.

The China Banking Regulatory Commission and other watchdogs have issued a slew of new rules to curb banks’ risky business.

Trust companies, together with other non-bank financial institutions such as brokerages, have become a vital source of credit, allowing banks to arrange off-balance-sheet refinancing for maturing loans that risky borrowers such as the local government financing vehicles (LGFV) cannot repay from their internal cash flow.

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

Without trusts, the banking system’s non-performing loans (NPL) ratio might be much higher, although accurate estimates are not possible.

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

China’s banking regulator recently said that outstanding bank-issued WMPs totaled 9.08 trillion yuan by end-June. The new data on trust company assets appears to encompass about 70 percent of that total, as bank WMPs usually involve cooperation with a trust.

The association data also includes funds that trust companies raise by selling WMPs directly to investors, without partnering 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.

RARE WINDOW

While WMPs often include only spotty disclosures about underlying assets, the trust association data offers a view of where WMP funds are flowing.

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

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

The banking regulator said the system-wide NPL ratio was 0.96 percent at the end of first half, up only 0.01 percentage point from the end of last year. But, that figure only covers on-balance-sheet loans, leaving a huge amount unmonitored, traders say.

About bambooinnovator
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 (www.heroinnovator.com), 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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