China Real Estate Trust Financing Drops 60% in June

Once a major source of credit for China’s small and medium-sized developers, financing from trusts dropped off precipitously in June as the country’s wealthy individuals seem to have lost their taste for the loosely regulated shadow banking products.

According to statistics released this week by consultancy Use Trust Studio, funds raised through trusts in China for real estate projects and companies totalled RMB 23.22 billion in June, a nearly 60 percent drop from the same month last year. Trust products are frequently organised by banks and other financial institutions in China as a way to funnel cash to companies that don’t qualify for traditional bank loans, and they often offer interest rates of well over 10 percent to investors.

The shortfall in trust fundraising came despite an increased number of offerings last month, as the total number of real estate related trust products introduced onto the market went up 18.78 percent in June, compared to the quantity offered to consumers during the same month last year.

Real Estate Leads the Drop Off in Shadow Banking

The drop off in funding for real estate trusts was even more severe than the fall in cash raised by the trust industry as a whole. Use Trust Studio’s data showed that the overall trust sector raised RMB 62.64 billion in June, down approximately 30 percent from the RMB 97.27 billion raised during the same month last year.

In terms of the quantity of trust products introduced during June for the whole industry, once again the number of offerings increased, jumping 15.29 percent compared to last year.

Increasing Risks Seen in Shadow Banking Activities

China’s loosely regulated, high yield trust products and other shadow banking activities are increasingly being pointed to as a source of risk as analysts and officials become concerned about excessive leverage in the economy during the current real estate slowdown.

An article in the Wall Street Journal last week cited Lian Ping, chief economist for China’s Bank of Communications, as warning that defaults in the nation’s loosely regulated “shadow banking” sector are among the economy’s greatest risks.

In February this year a trust product failed to meet its obligations to investors for the first time when a fund raised in Jilin defaulted. Since that time there have been a number of other defaults in entrusted loans and other shadow banking products.

Would be investors have grown particularly shy of real estate investments after developers in Ningbo and Hangzhou collapsed, and housing prices continue to slide nationwide.

Small and medium-sized real estate developers have increasingly needed to turn to the high interest debt vehicles as China’s central government has clamped down on credit to the industry in an effort to curb property speculation.