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Growth in China trust assets slows as shadow banking crackdown bites

A businessman looks at his mobile phone as he walks in the financial area of Pudong in Shanghai May 30, 2013. REUTERS/Carlos Barria
A businessman looks at his mobile phone as he walks in the financial area of Pudong in Shanghai May 30, 2013. REUTERS/Carlos Barria

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 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.

"We've seen other signs before (of a slowdown in shadow banking), but this is more authoritative," said May Yan, China banks analyst at Barclays in Hong Kong.

Yan said that rules put in place by the China Banking Regulatory Commission (CBRC) in March restricting the proportion of a wealth management product's (WMP) underlying assets that may be comprised of loans and other illiquid credit assets to 35 percent contributed to the slowdown.

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.

Beyond the rules set in March, the CBRC and other watchdogs have issued a slew of new rules to curb banks' risky business.

OFF BALANCE SHEET

Trust companies, together with other non-bank financial institutions such as securities 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.

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

Trust companies sell WMPs 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 slowdown in trust asset growth is a sign that the government's efforts to force economy-wide de-leveraging and prevent a possible debt crisis is bearing fruit.

In June, total social financing, the central bank's broadest measure of credit and equity flows from various channels, fell to its lowest level since April 2012, led by declines in types of credit associated with shadow banking.

But there are some signs that some would-be trust borrowers are finding alternative sources of credit. July was one of the busiest months on record for international loans to the Chinese property sector.

Analysts cited regulatory scrutiny of trust loans as a reason that mainland developers were turning to Hong Kong lenders.

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.

The latest data shows that the portion of trust funds invested in securities and real estate fell in the second quarter, while the portion invested in infrastructure and industrial enterprises rose.

($1 = 6.13 Chinese yuan)

(Editing by Simon Cameron-Moore)

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