Randomness (r_ness) wrote,

Look! Another mole!

Since last year, the Chinese authorities have been trying to clamp down on trust company lending.

Reuters reported last summer:
China's banking regulator has ordered trust companies to halt the launch of wealth-management products via banks, three sources familiar with the matter told Reuters on Monday.

Trust company products have been an increasingly popular way for banks facing credit quota restrictions to take loans off their balance sheets.

By repackaging the loans into equity- or fixed-income-linked products, trusts have been able to offer bank clients, typically rich individuals, much more attractive yields than are available on bank deposits.

With Beijing tightening controls on new loans, the outstanding value of trust products has jumped to more than 2 trillion yuan ($295.4 billion) from 600 billion yuan at the end of September as banks turned to trusts to keep money flowing into investment projects, the sources said.

"China's banking regulator is worried that these products may be used as tools by commercial banks to skirt overall credit controls," a source with a commercial bank said.
The FT described them around the same time last year:
But the move may be more than problematic. For a start these trust companies are rather nebulous things to begin with; encompassing shades of fund management, private equity, and hedge funds.

One defining feature is that they’re restricted from selling their products to just anyone.

They’re limited to raising money from large institutions and wealthy individuals — though in recent years that started to change. More and more of the trusts’ products have been sold via the banks, until we reached the current situation concerning Chinese regulators.
Standard Chartered's analysts Stephen Green and Lan Shen on why these trust products are so popular:
First, cash-rich depositors were frustrated with low [bank] deposit rates (around 2% for a one-year deposit), and trust companies were happy to offer 4% or thereabouts, principal guaranteed. Second, even though banks’ commissions on these products are low, they did not want their clients going to other banks, so they marketed them enthusiastically. Third, in some cases the banks were able to sell their own loan assets on to the trust company, which repackaged them and then sold them as wealth management products back to the bank’s own clients. This allowed the banks to manage their official outstanding net loan position, which was subject to the loan quota.
One of the important types of products offered is the trust loan:
These are loans extended by the trust company to one or more borrowers, which are then repackaged and sold on. We understand that quite a few real estate firms have borrowed from trusts at 15-20% annualised interest rates, given the banks’ inability (since late last year) to increase their exposure to this sector. A bank that is unable to lend to a client itself may find a trust company that is willing to lend, and then sell the asset through its own branches .
This morning, the FT published excerpts of a new report from Green and Shen:

Standard Chartered again, quoted in the FT:
[T]raditional trust products have seen a remarkable rebound since February 2011, reaching a record high of more than CNY 50bn in funds raised in April, as Chart 1 shows. Since the buyers of these products are mainly institutions and wealthy individuals, the regulator does not worry as much about them. Property-related trust product issuance has soared, doubling in April from January’s level. Developers are clearly thirsty for funds, and are willing to pay.

We checked several property-related traditional trust products’ issuance documents in April and early May, and found that average yields were around 10-12%. This, plus another 4-5% charged by the trust companies and other management fees, results in a 17-20% annual cost for the developers, nearly three times the benchmark lending rates.

The continued willingness of many developers to seek this funding shows how difficult it is to get loans from banks now. But the continued availability of funding for these products shows that wealthy individuals and corporates with cash to spare are still looking for a positive return to their funds. Some listed firms have ramped up their investment in trust products (which is in effect a play on the property sector). This is of course getting riskier for all involved.
The FT observes:
A government trying to get a grip on credit growth might want to take a look at a funding vehicle estimated to make up the bulk (90 per cent) of total issuance of property-related trust products last year, amounting to RmB286.4bn ($44bn), or 14.2 per cent of new bank loans to land developers. And you know if trust firms are lending to real estate developers, so are other (underground) sources.
A wave of money looking for a higher rates of return encounters a crowd of property developers desperate to borrow. Has this happened anywhere else?
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