China Trust Industry Growth to Slow by Half, Huabao Says

China’s trust industry, whose funds under management have risen as much as 60 percent a year thanks to returns five times those of bank deposits, may see growth cut in half by competition, said Huabao Trust & Investment Co.

Growth in funds managed at the trusts, which cater to clients with at least 1 million yuan ($163,200) for investment, may slow to 20 percent to 30 percent a year from an “unsustainable” 50 percent to 60 percent pace now, Chief Executive Officer Qian Jun said in an interview in Shanghai yesterday. Huabao, a unit of Shanghai Baosteel Group Corp., has 230 billion yuan of assets under management, he said.

Investors poured money into trusts as China curbed property prices, the stock market fell 38 percent from January 2010 and deposit rates remained capped. Trusts get higher returns by financing developers and local governments, through lending outside the bank system that’s become known as shadow banking. Lack of transparency has boosted concern that slowing economic growth will cause borrowers to default.

“Trust products are a little less regulated and reflect true demand for capital,” said Qian, who previously worked for Bank of America Corp. and Morgan Stanley, and earned an MBA from Duke University. “The stock market is still not doing well and real estate is still under government control, so people have to beat inflation and put their money somewhere.”

China’s trust industry had 9.45 trillion yuan of assets under management at the end of June, according to the China Banking Regulatory Commission, which oversees the industry. That was an increase of 27 percent from the beginning of the year and an almost eight-fold surge since 2008.

Deposit Cap

Banks and other financial institutions have offered wealth management products and other investment options in a bid to hold on to deposits. China’s central bank currently caps one-year deposit rates at 110 percent of its 3 percent benchmark. Inflation in June was 2.7 percent, according to government data.

The People’s Bank of China removed the floor on lending rates last month as part of its efforts to liberalize the nation’s interest rates. China may abolish its cap on five-year deposit rates as the next step in that process, Caijing Magazine reported this week.

“If all the banks become like brokerages and do everything they can, that will probably knock us out of business, but that’s long term,” Qian said.

Non-bank Lending

Trusts account for 21 percent of the country’s estimated $5.9 trillion in non-bank lending, according to a May 3 report by JPMorgan Chase & Co. economists led by Zhu Haibin. That amount is 69 percent of China’s 2012 gross domestic product.

“We are alternative funding,” Qian said. “We don’t think we’re shadow banking. Shadow banking should be beyond regulation. It’s something not in the banking system and not regulated. Trust companies are highly regulated.”

The Communist Party’s Politburo Standing Committee, China’s top decision-making body, called on authorities to be on guard against risks from the financial sector in April as the nation seeks to stabilize growth, which is on pace this year for the slowest expansion in 23 years. China’s National Audit Office announced July 28 that it was starting a nationwide audit of local government debt.

Chinese banks’ second-quarter bad loans rose to 539.5 billion yuan, the seventh straight quarterly increase, according to data from the regulator. That’s 0.96 percent of total outstanding credit.

Citic Trust Co., a unit of China’s biggest state-owned investment company, said in January that a steel company didn’t make loan payments on time that would have been used to pay investors in a trust product.

“When I look at the whole industry, I do not see systematic risk,” Qian said. “There are good trust firms and bad trust firms. What I’m afraid of is the weak ones go bust or default on certain deals -- one bad deal could impact the whole industry.”

— With assistance by Allen Wan

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