China’s trust companies, part of the shadow-banking industry, boosted their investment in equities by a record 225 billion yuan ($36 billion) in the first quarter, adding fuel to the country’s stock-market rally.
About 777 billion yuan of high-yield trust products were invested in stocks at the end of March, more than double the 314 billion yuan a year earlier, according to data released by the China Trustee Association on Wednesday.
China’s capital controls and weakness in the property market have helped to channel money into stocks, driving a 112 percent surge in the Shanghai Composite Index over the past year. Many investors have turned to so-called umbrella trusts to raise funds to purchase shares as an alternative to the margin finance offered by Chinese stock brokers.
An umbrella trust receives funding from both private investors, the banks’ wealth-management products, securities firms and other companies, and invests the proceeds in shares or other markets. Because the companies and wealth-management vehicles receive a fixed return, and private investors receive returns based on stock-market performance, it has effectively become a way for Chinese to borrow from trusts and banks to purchase shares.
With total margin finance extended by stock brokers on the Shanghai and Shenzhen exchanges standing at 1.9 trillion yuan as of May 5, the Chinese regulators have been trying to restrict the use of umbrella trusts for stock-market investing.
Great Wall Securities Co. was suspended in April from adding margin finance and securities lending accounts for three months after the China State Regulatory Commission said it had sold services to unqualified investors and distributed umbrella trust products. China Everbright Bank Co. plans to cut the leverage ratio in its financing of umbrella trust products to no more than 1:2 from 1:2.5, as of May 18, the financial data provider Wind reported on Tuesday.
Despite the increased lending by trust companies for stock market investment, growth in the wider shadow banking market continued to slow in the first quarter in line with government efforts to reduce risks in the financial system.
Total trust assets under management grew at the slowest pace in 12 quarters, gaining 3 percent to 14.4 trillion yuan, according to the trustee association. At the end of March, China had 425 “risky” trust products valued at 97.4 billion yuan, up from 369 products valued at 78.1 billion yuan three months earlier.
— With assistance by Jun Luo