China’s trust assets surged 46 percent last year to a record 10.9 trillion yuan (US$1.8 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, or 0.27 percent of the industry’s assets at that time, the China Trustee Association said in a statement on its Web site yesterday.
Asset quality is “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 one decade last month as investors in a 3 billion yuan high-yield product issued by China Credit Trust Co (中誠信託) were bailed out days before it matured.
About 5.3 trillion yuan of trust products will be due this year, up from 3.5 trillion yuan last year, Haitong Securities Co (海通證券) estimated last month, warning that firms can 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 Co (中信建投證券), said by telephone. “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 surged more than fourfold from the beginning of 2010 even as policy makers 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 & Co, wrote in a note yesterday. “Credit continued to be channeled to unproductive and risky entities.”
Since 2012, more than 20 trust products totaling 23.8 billion yuan have run into payment issues, according to UBS AG.
About half of these cases are still in legal process, UBS’ Hong Kong-based economist Wang Tao (王濤)wrote in a Jan. 27 note.
Investors in the China Credit Trust product recouped their principal after selling their rights to unidentified buyers days before the Jan. 31 maturity.
China Credit Trust sold the investment in February 2011 with an indicated annual return of 9.5 percent to 11 percent for different tranches, sales documents show.
Industrial & Commercial Bank of China Ltd (ICBC, 中國工商銀行) distributed the product, which was structured to raise funds from wealthy investors for a coal miner that later collapsed.
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