Chinese trusts reduce lending to risky developers

Tue Apr 15, 2014 4:21am EDT

* Property trusts drop by 50% in first quarter

* Loans available mostly to high quality projects

* New rules from CBRC likely to increase wariness

By Lianting Tu

SINGAPORE, April 14 (IFR) - Trust companies in China are becoming more cautious about lending and are reducing their exposure to the real estate sector amid rising defaults.

Issuance of collective property trusts to the public plunged 50% to Rmb50.7bn (US$8.2bn) in the first quarter of 2014 from the fourth quarter last year, according to Use Trust, a trade website for the industry. In the previous year, issuance was virtually the same from the fourth quarter to the first, Use Trust said.

The drop in lending to the real estate sector reflects borrowers pulling away from trust financing as well as trusts scaling back their lending, said Bei Fu, a Hong Kong-based real estate analyst with Standard & Poor's.

It also comes as regulators in China clamp down on trusts as they seek to rein in the so-called shadow banking sector. The China Banking Regulatory Commission (CBRC) issued rules for the trust industry just last week that make officers personally accountable for irresponsible lending, according to a draft of the rules circulated online.

The new regulation requires trust shareholders to provide liquidity support and capital injections when necessary, according to the draft.

The risk aversion also is reflected in the reduced size of each trust. According to Use Trust data, there were only 30 real estate trusts that raised more than Rmb500m each in the first quarter. The average size of the financings were Rmb215m in the quarter, compared to an average of Rmb313m in 2013.

Property trusts still represent the biggest part of trust financing, but their share of issues dropped to 30% of the industry in the first quarter from 35.5% a quarter before.

"Trust companies have become more cautious towards lending to small and medium-sized property developers amid dim sales prospects," said Zhang Yin, a Shanghai-based analyst for non-financial institutions at Industrial Securities.

They have become especially worried about lending money to small developers, said S&P's Bei, because they may not be able to repay the loans when they come due in 18 to 24 months.

"By then, China may have become more market-driven and the implicit government guarantee may not be there anymore," she said.

China's trust companies are non-bank lenders that sell high-yielding wealth management products to investors and use the proceeds to lend money to borrowers, including coal companies, local governments and others in addition to property developers. They are a key part of China's shadow banking industry of transactions that take place outside conventional financial channels.

A near-default earlier this year by a trust that lent money to a coal miner that failed to repay its loans sounded the alarm on the industry for investors and regulators alike .

BIG CITY LENDING

Although trust companies generally are not liable for investment losses, they want to avoid reputation risk and legal risk, said Qiang Liao, a Beijing-based banking analyst with S&P.

Zhejiang Xingrun Real Estate in the city of Ningbo collapsed last month as it was unable to repay more than Rmb3.5bn of debt. The default raised concerns that more smaller cash-strapped developers may fail.

One trust company based in Zhejiang province reacted by lowering its lending to the real estate sector to about 25% of its portfolio this year from 75% last year, according to Robert Davis, senior portfolio manager for INGIM Emerging Markets High Yield Dividend fund, citing a trust company staff member he met during an investment trip to China in March.

An employee at a different trust company had a similar view.

"We have stopped lending to developers in third-tier and fourth-tier cities and we now only focus on high quality projects in prime locations," the employee said.

Meanwhile, investors have become more aware of the risks in property trusts and are demanding higher yields. Returns on real estate trusts edged up to 9.69% in the first quarter from 9.51% in 2013.

"Investors have grown more sophisticated about risks associated with trust products," the trust company employee said.

"They are more selective now and paying more attention to the quality of the developer, the guarantor, and the collateral. They are trying to strike a balance between return and risk now, whereas before they only pursued higher returns," he added.

On the flip-side, large developers are relying less on trust financing because of the costs involved and uncertain regulatory environment surrounding them.

NEW RULES

Chinese trust companies had been expecting new rules to be rolled out for the sector, which may partly explain their increased caution. The CBRC's latest rules may in fact make trust lenders even more careful.

In addition to the new requirements for shareholders and officers, the regulator will also closely monitor product offerings by requiring trust companies to report new products 10 days before selling them.

The compensation system for trust employees also came under scrutiny by the CBRC. Employee bonuses may need to be amortized and may be linked to the performance of the trust products they arrange.

Not surprisingly, the new rules also call on trust companies to manage their risk exposure to real estate developers, as well as local government funding vehicles, mining companies and other industries considered to have reached overcapacity. (Reporting By Lianting Tu; editing by Abby Schultz and Christopher Langner)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.