China Trust Assets Surge to $1.8 Trillion Amid Default Risks

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Photographer: Tomohiro Ohsumi/Bloomberg

Pedestrians walk past Arturo Di Modica's 'The Bund Financial Bull' sculpture on the Bund at night in Shanghai.

China’s trust assets surged 46 percent in 2013 to a record 10.9 trillion yuan ($1.8 trillion), underscoring investor interest in products that pay more than bank deposits even as default risks mount.

About 20 billion yuan of trust products had repayment difficulties in 2012, accounting for 0.27 percent of the industry’s assets at that time, the China Trustee Association said in a statement on its website today. Asset quality is “quite sound and systemic risks are impossible” with 9.06 billion yuan of reserves set aside, the association said.

China averted its first trust default in at least a decade last month as investors in a 3 billion-yuan high-yield product issued by China Credit Trust Co. were bailed out days before it matured. About 5.3 trillion yuan of trust products will be due this year, up from 3.5 trillion yuan in 2013, Haitong Securities Co. estimated last month, warning that firms can no longer shoulder all the risks tied to offering implicit guarantees.

“The rapid expansion of trust assets over the past few years is unlikely to be sustained because the government is stepping up oversight of the sector,” Wei Tao, a Beijing-based analyst at China Securities Co., said by phone. “Systemic risk is manageable because the economic situation will remain under control and regulators won’t let the situation get out of hand.”

Overtook Insurance

With the help of guarantees on investments, trusts have overtaken insurance to become China’s biggest financial segment after banks. Their assets under management surged more than fourfold from the beginning of 2010 even as policy makers sought to curb money flows outside the formal banking system.

Banking in the Shadows

About 48 percent of the trust products were sold to provide finance for borrowers, according to today’s statement. A quarter of the assets went to the infrastructure sector at the end of 2013, an increase of 1.6 percentage points from the beginning of the year, while 10 percent were for real estate.

“The lack of defaults over the past five years has further exacerbated China’s debt and capital allocation problems,” Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a note today. “Credit continued to be channeled to unproductive and risky entities.”

Since 2012, more than 20 trust products totaling 23.8 billion yuan have run into payment issues, according to UBS AG. About half of these cases are still in legal process, UBS’s Hong Kong-based economist Wang Tao wrote in a Jan. 27 note.

Recouped Investment

Investors in the China Credit Trust product recouped their principal after selling their rights to unidentified buyers days before the Jan. 31 maturity. China Credit Trust sold the investment in February 2011 with an indicated annual return of 9.5 percent to 11 percent for different tranches, sales documents show. Industrial & Commercial Bank of China Ltd. distributed the product, which was structured to raise funds from wealthy investors for a coal miner that later collapsed.

A 973 million-yuan product issued by Jilin Province Trust Co. missed four batches of payments since November as the borrower is going through a restructuring, Shanghai Securities News reported yesterday. Jilin Trust issued the product called Songhuajiang River No. 77 in six batches from November 2011 to March 2012 at an annual return of 9.8 percent to finance mining projects of Shanxi Liansheng, according to the report.

Jilin Trust

The borrower is in talks with investors and the company’s financial condition “has no problem,” the newspaper said, citing Jilin Trust. The local government began a restructuring agreement that needs approval signatures from a few banking creditors, according to the report. China Construction Bank Corp. (939) is the custodian of the product.

“Even as non-performing financial assets increase amid the economic slowdown, so far only some individual trust products have run into problems and it’s not a widespread phenomenon,” the trustee association said in today’s statement. The group is a non-profit organization overseen by the China Banking Regulatory Commission.

Trusts are the least likely part of the financial system to have systemic risks because buyers are supposed to shoulder risks themselves, according to the statement. Profit of the trust industry rose 29 percent from a year earlier to 56.9 billion yuan in 2013, it said.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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