Falling confidence: China’s shadow banks are turning away from ownership to survive

SHANGHAI/HONG KONG, Dec 12 (Reuters) – For more than a decade, China’s developers’ debt-fueled construction boom has enriched the country’s shadow banks, eager to capitalize on the needs of a starving industry credit and too risky for traditional banks. lenders.

Now, following a government crackdown on property companies’ debt binge, that demand for credit has collapsed – along with the biggest source of income for shadow banks, also known as trust companies.

China’s shadow banking sector – worth around $3 trillion, roughly the size of Britain’s economy – is scrambling for new business, including direct investment in companies, family offices and asset management.

It is also shrinking, with formerly well-paid employees leaving for other jobs after picking up new offers. The difficult situation of the industry contrasts sharply with that of the main Chinese financial companies, which the crisis has not yet seriously affected.

“Everyone ate a bite of rice and survived one more day,” said Jason Hao, who quit his job this year at a Shanghai trust company after his salary dropped by 4 million yuan ($570,000). ) per year at around 240,000 yuan ($34,000).

He now works in an asset management company.

Data from industry tracking website Yanglee.com shows 1,483 real estate-related trust products were sold in 2022 through the end of September, down 69.7% from 4,891 during the same period last year.

The transaction value of 2022 was 117.2 billion yuan, down 77.9% from 531.3 billion yuan. Real estate products accounted for 8.7% of all trust products in September, compared to about 30% in the same month over the past two years.

Both the National Audit Bureau and China’s banking regulator have reviewed trust company accounts and agreements this year for risk, three people with knowledge of the matter said.

The National Audit Office and the CBIRC did not respond to requests for comment.

At an internal meeting in October, an executive at Shanghai Trust, a state-owned company that once focused on real estate, said revenue had nearly halved this year from a year earlier, according to two people with direct knowledge of the meeting.

The company plans to focus on asset management and family offices to shore up its finances while moving away from developer lending, once its core business, one of the people said.

Shanghai Trust did not respond to requests for comment.

The top priority for all trust companies now is “how to transition, what will allow you to survive,” said another trust company employee, who like other current employees interviewed for this article, declined to be named due to the sensitivity of the issue.

RISK OF CONTAGION

Trust companies were dubbed “ghost banks” because of the way they operated outside of many of the rules that govern commercial banks. Banks in China sell wealth management products, the proceeds of which are channeled through trust companies to real estate developers and other sectors that are unable to tap bank financing directly.

Because of the risk, shadow banks could charge interest rates of up to 18%, well above the typical rates of 2-6% seen in banks at the height of the boom.

Concerns about outsized exposure to property developers have grown this year as the struggling sector in the world’s second-largest economy has rapidly slowed.

Beijing has stepped up support in recent weeks to quash a liquidity crunch that has stifled the property market, which accounts for a quarter of China’s economy and has been a key driver of growth.

EXCLUDING OPTIONS

In the trust unit of China Construction Bank (CCB) and Zhongrong International Trust, which used to be one of the largest shadow bankers in China, investing in private equity and venture capital funds has become more common, said two people with direct knowledge of the companies.

CCB Trust wants to invest in leading companies in niche areas; it recently invested in Beijing Tianyishangjia New Material Corp, which makes materials used in train brakes, a person with the company said.

Zhongrong International Trust has been working with local governments, including Qingdao provincial authorities, to find early-stage contracts in smart manufacturing, an executive there said.

Avic Trust, based in Jiangxi, has invested in waste treatment companies, including financing photovoltaic power plants which it then leases, said a person with direct knowledge.

CCB Trust, Zhongrong International Trust and Avic Trust did not respond to requests for comment.

In some cases, trust companies buy projects from struggling developers and hire new managers to recoup their losses, according to company records and three people at trust companies who are aware of the acquisitions.

Ping An Trust, Zhongrong International Trust, Everbright Xinglong Trust and Minmetals International Trust have all purchased project companies from struggling developers in recent months, according to company records and announcements.

Ping An Trust, Zhongrong International Trust, Everbright Xinglong Trust and Minmetals International Trust did not respond to requests for comment.

For Hao and other former trust employees, the search for corporate stability sounds familiar.

“My situation is now better than it was when I left the trust, but will never be as good as it was during the height of the boom when I was there,” Hao said. .

($1 = 6.9905 Chinese yuan renminbi)

Reporting Engen Tham in Shanghai, Clare Jim and Julie Zhu in Hong Kong; Editing by Sumeet Chatterjee and Gerry Doyle

Our standards: The Thomson Reuters Trust Principles.

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