Chinese trust assets surge, but risks climb

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Bloomberg Shanghai

China’s trust assets surged 46 percent last year to a record 10.9 trillion yuan (R20 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 yesterday. Asset quality was “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 the investors in a 3 billion-yuan high-yield product issued by China Credit Trust were bailed out days before it matured.

About 5.3 trillion yuan of trust products would be due this year, up from 3.5 trillion yuan last year, Haitong Securities estimated last month, warning that firms could 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, said.

“Systemic risk is manageable because the economic situation will remain under control and regulators won’t let the situation get out of hand.”

With the help of guarantees on investments, trusts have overtaken insurance to become China’s biggest financial segment after banks.

Their assets under management have surged more than fourfold from the beginning of 2010 even as policymakers sought to curb money flows outside the formal banking system.

About 48 percent of the trust products were sold to provide finance for borrowers, according to yesterday’s statement. A quarter of the assets went to the infrastructure sector at the end of last year, 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, said. “Credit continued to be channelled to unproductive and risky entities.”

Since 2012, more than 20 trust products totalling 23.8 billion yuan have run into payment issues, according to UBS. About half of these cases were still in legal process, UBS’s Hong Kong-based economist Wang Tao said last month.

Investors in the China Credit Trust product recouped their principal after selling their rights to unidentified buyers days before the maturity at the end of last month.

China Credit Trust sold the investment in February 2011 with an indicated annual return of 9.5 percent to 11 percent for different tranches, documents show.


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