Real Estate Loans by China’s Shadow Banks Drop 49% as Credit Dries Up

China’s real estate developers borrowed 49 percent less cash from the nation’s trusts during the first quarter of 2014, reversing a surge of informal credit to the industry as default concerns rise.

According to data from consulting firm Use Trust Studio, issuance of real estate targetted trusts, which raise money from companies and individuals to loan to property businesses fell to RMB 50.7 billion from January through March of this year, compared to RMB 99.7 billion raised in the fourth quarter.

Loans to the real estate sector through these shadow banking channels had soared by as much as ten times during the fourth quarter of last year, compared to the same period in 2012, after China’s mainstream banks began cutting back lending to the industry.

The drop-off in shadow bank lending is believed to reflect growing concern over the health of China’s real estate industry, as even the promise of high rates of return that the trusts offer is failing to persuade investors to direct their money into the once highly sought-after sector.

New property trust offerings accounted for 30 per cent of total trust sales in the first quarter, down from 33 per cent in the fourth quarter of last year, Use Trust said. Its figures are for collective products only, which are sold to more than one investor.

Most of the trusts are operated as off-balance-sheet products by traditional banks or investment companies in China, and earlier this year at least one bank indicated that it was steering away from arranging such loans for real estate businesses.

A Trust Failure and a Credit Freeze

During early February, government media reported that that Jilin Province Trust Co Ltd had failed to repay investors for $126 million worth of trust products which matured early in the year.

Then, in late February, according to a report in the official Shanghai Securities Journal, China Industrial Bank Co., Ltd said that it had suspended “mezzanine financing in the real estate sector” and “financial business in the property supply chain.”

There were also rumors in the market that the Bank of Communications, China Merchants Bank, China CITIC Bank and Bank of Agriculture had also begun scaling back property-linked loans.

The bank’s reference to “mezzanine financing” was understood by most observers to indicate the arrangement of trust products.