With warnings like these, you can see why trusts are becoming an issue for China:
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Fitch Ratings cautions that [Chinese] lending has not slowed nearly as much as official data suggests, due to the increasing amount of credit being shifted off of Chinese banks’ balance sheets via informal securitisation (ie the re‐packaging of loans into investments products for sale to investors).
Early this month, the China Banking Regulatory Commission (CBRC) rather informally banned trust companies, or Xintuo gongsi, from working with banks. As previously noted, these trusts play a big role in how these off-balance sheet, but still heavily interconnected, securitisations are formed.
But the move may be more than problematic. For a start these trust companies are rather nebulous things to begin with; encompassing shades of fund management, private equity, and hedge funds.
One defining feature is that they’re restricted from selling their products to just anyone.
They’re limited to raising money from large institutions and wealthy individuals — though in recent years that started to change. More and more of the trusts’ products have been sold via the banks, until we reached the current situation concerning Chinese regulators.
The below, from Standard Chartered, shows that development.
Why the sudden boom?
StanChart’s Stephen Green and Shen Len have some ideas:
First, cash-rich depositors were frustrated with low [bank] deposit rates (around 2% for a one-year deposit), and trust companies were happy to offer 4% or thereabouts, principal guaranteed. Second, even though banks’ commissions on these products are low, they did not want their clients going to other banks, so they marketed them enthusiastically. Third, in some cases the banks were able to sell their own loan assets on to the trust company, which repackaged them and then sold them as wealth management products back to the bank’s own clients. This allowed the banks to manage their official outstanding net loan position, which was subject to the loan quota.
As for the trusts’ actual products — you’ve got things ranging from equity to bills.
But the ones relating most to the banks are . . .
Trust loans. These are loans extended by the trust company to one or more borrowers, which are then repackaged and sold on. We understand that quite a few real estate firms have borrowed from trusts at 15-20% annualised interest rates, given the banks’ inability (since late last year) to increase their exposure to this sector. A bank that is unable to lend to a client itself may find a trust company that is willing to lend, and then sell the asset through its own branches . . .Loan assets, which are the banks’ loans, repackaged and sold on to investors. It is likely that these included some infrastructure loans, including those to local government investment vehicles, LGIVs . . . The volume of LGIVs has declined this year, which we assume is because the CBRC made it much more difficult for banks to sell their loans through their own branches, starting in December 2009 . . .
Portfolio products are hybrid products where money raised is managed by the trust and allocated to a variety of asset classes, which may include loans. They have been very popular this year. It is unclear how much of the money raised in this way is finding its way back into loan-type assets, but given the depressed nature of the stock market, we imagine loans are still popular.
The point is, these are sizable positions. StanChart thinks the total amount of lending done by trusts and the total value of repackaged bank loan products issued in the first five months of this year was RMB690bn ($100bn). For context, that’s about a month’s worth of Chinese bank lending.
(Other estimates are even higher. The Economic Observer has RMB2,000bn in the first half of 2010, while the Shanghai Benefit Investment Consulting thinks they were at RMB2,5000bn).
The issue then, is that even as China attempts to curb bank loans — sometimes by literally pulling the plug on them — these trusts have stepped in to fill some of the space left behind. Small wonder then, that the CBRC is so keen to crack down on the industry to make its lending restrictions effective.
Ah — and back to the problematic bit.
The CBRC is likely to encounter more than a little bit of resistance from banks — who will be foregoing a source of commission — as well as the real estate and construction companies. They’ll be losing a chunk of their financing, which could mean slower GDP growth for China.
But there’s also the trusts themselves to think about. It regulators do manage to take away their bank business that means they’ll have to go back to their more traditional business model.
And that could be, umm, quite a regression.
Related links:
China’s trust sector: A new chapter – KPMG, 2008
Banks place faith in China’s trust companies - FT, 2008