Dire predictions for the trust industry have not materialized, because of smart interventions by China´s financial authorities. But that does not mean the industry is off the hook, writes financial analyst Sara Hsu in The Diplomat. Danger from the property market will remain till the end of 2014.
China’s property market reflects a general downturn and restructuring, as fixed asset investment has reached its peak. The state economic plan is set on turning away from an investment-fueled economy to a consumption-led economy. However, the economy must first survive the deflation of the property bubble. The first shoe to drop was the March failure of Zhejiang Xingrun Properties, with RMB 3.5 billion in debt. Then, new home prices fell for the first time in about two years in May as demand in many regions of the country slackened. Some developers are now saddled with empty apartment buildings and the number of developers facing financing problems is on the rise, with small and medium sized firms already strongly affected.
A cooling property market will have repercussions for the trust industry. The question is, to what extent? Ten percent of the trust industry (accounted for by real estate loans) amounts to more than RMB 1 trillion. Suppose that a large proportion of these loans stop performing – say, 60 percent. That is about RMB 600 billion, almost equivalent to the amount of overdue loans by year end 2013 announced by China’s top ten banks two days ago. Banks’ overdue loans are expected to be supported by the Chinese government through implicit financial assistance (liquidity injections where needed) and, for the top four banks, removal of non-performing loans to asset management companies. Trust companies, by contrast, do not enjoy state support, explicit or implicit. The liable parties are the trust product holders themselves who may be left holding the bag if trust companies cannot deliver on property-based trust product payments.
What this indicates is that the trust industry is one to keep an eye on at least through the end of 2014, as additional real estate trust products come due and the property market and real economy continue to suffer. About RMB 5.3 trillion in trust products will mature in 2014, and how these debts are settled will have a lasting impact on China’s financial landscape.
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