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