Tricky times loom for mainland banks as trust products mature
May 19, 2014 Leave a comment
Tricky times loom for mainland banks as trust products mature
Monday, May 05, 2014
The big four state-owned banks recently announced their first-quarter performances.
Apart from Industrial and Commercial Bank of China (1398), the others saw double-digit growth in profit. But the ideal earning performance cannot eliminate investors’ concerns over mainland banking risk.
Investors are still worried about issues brought by shadow banking and trust products, which will make the bad debts of the banks soar. Because this month the mainland financial markets will meet a peak moment due to the deadline of trust products. The real peak will appear, however, in the third quarter, when 1 trillion yuan (HK$1.24 trillion) of trust products reach maturity – far higher than than 694 billion yuan worth of items that matured in the first quarter.
The trust products are focused on mainly because many involve loans to property developers or coal-mining enterprises. These businesses borrow from the trust products mostly because they cannot get loans from the banks.
Only about one-quarter of the funds from trust companies come from rich individuals or firms, and a lot of the rest are from banks, which sell financial products to individual depositors to obtain the money.
So if relevant enterprises default, mainland banks won’t be able to stay unexposed. Also for this reason, investors are worried that in the third quarter, mainland banks may face big default problems.
In 2012, trust companies also encountered a real estate developer default. But then, the domestic four asset- management companies and private- equity investors helped to alleviate the situation.
So, although the amount of the maturing products from the trust companies is large, the central government has full ability to control the problem.
But any default is likely to bring short-term volatility to financial markets, along with systemic risks for China. Andrew Wong Wai-hong is an independent commentator on financial markets.
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