Growth of China’s Shadow Banks Slows by 36% in Q1

Assets managed by China’s trust management firms grew at only 64 percent of their average rate during the first quarter of 2014, as the country’s shadow-banking industry struggled with worried customers, declining returns, and new competition from online funds.

Government-backed industry group the Chinese Trustee Association released its latest data on activity by the non-bank lending organisations and found that assets managed by China’s 68 trust management company’s reached RMB 11.73 trillion by the end of March. This total is up only 7.52 percent from the amount managed on January 1st.

The industry had averaged 11.77 percent quarter on quarter growth from 2010 to the end of 2013.

Real Estate Firms Rely on Trusts

Off-balance sheet equity trusts are commonly arranged by banks in China to provide credit to borrowers, such as property developers, who do not qualify for traditional bank lending. The trusts often are used as mezzanine financing for real estate projects which are already underway, but are not yet able to begin selling units to buyers.

Typically, the trust companies purchase a majority of equity in the project company, and the developer then buys back the shares in the company when the trust reaches maturity, after paying a high interest rate.

As the real estate market cools off, and some firms begin to default, many investors are less eager to loan to the sector.

The drop in assets controlled by the trusts means a reduction in the pool of capital available to developers, particularly for small and medium-sized companies that don’t have access to international capital markets.

Return Rates Begin to Slide

Part of the reason that growth in assets controlled by the trusts is dropping off, is that the products are becoming less attractive. According to the association’s report, the annualized proceeds rate of China’s trust products equalled 6.44 percent in the first quarter, lower than the annual proceeds rate of 7.4 percent last year.

With most trusts requiring customers to lock up capital for one to three years, and to make a substantial minimum financial commitment, any decrease in return is likely to send potential buyers hunting for alternatives.

Online money market funds such as TenCent’s ‘Licaitong and Alibaba’s Yu’e Bao are now offering retail investors returns of 5.25 percent or more annually. Yu’e Bao alone had attracted RMB 541.28 billion in deposits by the end of the most recent quarter.

New Rules Could Pose New Challenges

Besides fighting against new competition, the trusts are also coming up against some new rules. The Trustee Association said in its announcement that the China Banking Regulatory Commission issued new rules tightening oversight of the sector this month.

These new regulations bar trust companies from using “nonstandard funding pools,” which lump investments together and enable trusts to make cash payouts on maturing products with proceeds from the sales of new investment products.

The rules also call on shareholders of trust firms to shore up capital or scale back their business if the firms suffer losses and have fund shortages.