S.Xinhua Trust Bank Rabbit, China’s shadow financiers are selling at bottom prices. The company filed for bankruptcy in May, becoming the first Chinese trust to fail in more than 20 years. Parts of the company have since been put up for sale on Taobao, an online e-commerce platform, at his 30% discount. The company’s company cars were recently added to the auction by court order. Bargain hunters can get Xinhua trademarks for just 12,000 yuan ($1,650).
The collapse of shadow financiers was an early warning. The same forces that brought down shadow financiers are now eroding China’s 21 trillion yuan trust industry. The country’s economic growth has been weaker than expected and property developers have been caught in an unprecedented wave of debt defaults and restructuring. Chinese trusts, which channel money from investors into infrastructure, real estate and other opportunities, are exposed to both developments. Xinhua’s bankruptcy ended relatively easily, but an even bigger one may be on the horizon for Zhongrong, one of the country’s biggest trust companies, when it failed to pay its clients in mid-August. Panicked investors fear more companies will fall into the trap and bankruptcies will lead to more economic problems.
During several years of strong economic growth in China, trusts and their investors thrived, with investment products often yielding annual returns of 10% or more. Property developers and local governments are willing to pay high interest rates, transactions are subject to less regulatory scrutiny than bank loans, and trusts say investors’ cash is protected by the state in a manner similar to bank deposits. benefited from widespread recognition. That perception is long gone now, and if more developers default, it’s likely that more shadow banks will become insolvent.
Zhong Rong, which managed about 630 billion yuan of trust products at the end of last year, shows how the pain is spreading from the real estate industry to the financial system. When China’s fifth-largest developer Sunac defaulted last year, local governments began freezing the company’s funds to ensure the project was completed. One of the places where the funds were frozen was in the central Chinese city of Wuhan, which included investments related to Zhongrong. Across the industry, about 7% of trust products were directly invested in the real estate sector at the end of March. Analysts estimate that exposure could reach up to 30% through indirect investments through securities. apricotBank.
The risk of contagion is particularly high because trust lending is ubiquitous and opaque, and investing in trusts creates complex financial relationships. For example, Zhongrong’s investors include several publicly traded companies. Such companies often invest in trusts for higher returns. Meanwhile, trusts have invested about 4.6 trillion yuan in stocks, bonds and other funds. It also finances local government projects, and cities and provinces across China are currently struggling to pay off their debts, which are estimated to reach 57 trillion yuan by the end of 2022.
There is also another avenue where trouble can spread. Zhongrong is managed by a much larger investment management company called Zhongzhi, which manages nearly 1 trillion yuan of assets across a vast array of sectors. Zhongzhi is also suffering from a liquidity crisis, reportedly unable to repay 230 billion yuan it owes to about 150,000 wealthy investors. Across the country, similar investment management firms have millions of customers. Since news of Zhongzhi’s troubles broke, worried customers, many of them regular office workers, have been ringing their phones trying to make sure their savings are safe, said another of these companies. company executives reported.
These ties between trusts, municipalities and developers, and the prospect of big financial firms going bankrupt, are terrifying for investors. In fact, Mr. Zhong’s problems have contributed to the poor performance of China’s stock market. CSI The benchmark index, the 300, has fallen more than 6% this month. Interventions by the authorities, such as the stamp duty reduction on August 27, have had little impact.
Policy makers are keenly aware of the problems facing trusts. After all, they helped make much of that happen through their attempts to mitigate risk. Since 2017, China’s shadow banks have come under intense regulatory scrutiny as part of attempts to transfer opaque off-balance-sheet loans to banks. Attacks by authorities have intensified in 2020, when the state introduced tough limits on the leverage of property developers. The move resulted in the lowest shadow banking product issuance in a decade in the first half of the year, according to research firm Capital Economics. The crackdown has robbed the property market of liquidity and confidence, forcing both developers and trust companies into default.
In the short term, much of the pain will be borne by wealthy investors, as the threshold for investing in trust products is usually above 300,000 yuan. Most companies can’t even demand the return of their initial investment, as products usually have terms that investors can’t exit from (up to two years in some cases). This could prevent a full-blown financial crisis caused by a crackdown on shadow financiers, and would give governments time to consider the turmoil. News agency Bloomberg reported that China’s banking regulator has already set up a special commission to investigate the Zhongzhi matter. But government inspectors may not like their findings, given the vast shadowy connections these companies have across the economy. ■