For over a decade, Chinese developers’ debt-fuelled construction boom enriched the country’s shadow banks, who were set on capitalizing on the needs of an industry urgently requiring credit and too risky for traditional lenders.
Now, in the wake of a government crackdown on real estate firms’ debt binge, that credit demand has fallen – and so too has the single largest revenue stream for shadow banks, also referred to as trust firms.
China’s shadow banking industry – valued at about $3 trillion, almost the size of Britain’s economy – is seeking new business, including direct investment in companies, asset management, and family offices.
It is also contracting, with once-highly-paid employees resigning for other jobs after hunting for new deals. The industry’s plight is significantly different from China’s main street financial firms, which the crisis has not yet severely affected.
“Everyone was eating a mouthful of rice, surviving another day,” said Jason Hao, who quit his job this year at a Shanghai trust firm after his pay fell from as much as 4 million yuan ($570,000) a year to around 240,000 yuan ($34,000).
He is currently working at an asset management firm.
Data from industry-tracking website Yanglee.com indicates 1,483 real estate-related trust products were sold in 2022 through the end of September, a drop of 69.7% from 4,891 during the same period in 2021.
The value of this year’s deals was 117.2 billion yuan, a fall of 77.9% from 531.3 billion yuan. Real estate products made up 8.7% of all trust products in September, in comparison to about 30% in the same month in the past two years.
China’s banking regulator and the National Audit Office have both been reviewing trust firm accounts and deals in 2022 for risk, said three people familiar with the matter. The CBIRC and the National Audit Office would not reply to requests for comment.
In an internal meeting in October, an executive at Shanghai Trust, a state-owned firm that once concentrated on property, said revenue had plunged by almost half in 2022 compared with the previous year, according to two people with first-hand knowledge of the meeting.
The firm intends to focus on family offices and asset management to prop up its finances while shifting away from lending to developers, once its core business, one of the people said. Shanghai Trust would not reply to requests for comment.
The main priority for all trust companies currently is “how to transition, what will let you survive,” said another trust firm employee, who like the other current employees interviewed for this article asked to remain unnamed because of the sensitivity of the matter.
Contagion Risk
Trust firms were called “shadow banks” because of how they operated outside most of the rules that guide commercial banks. Chinese banks sell wealth management products, the proceeds of which are transferred by trust firms to property developers and other sectors that are not able to tap bank funding directly.
Because of the risk, shadow banks could charge interest rates of up to 18%, much greater than the normal 2% to 6% seen at banks at the peak of the boom. Concerns about vast exposure to property developers have deepened this year as the embattled sector in the world’s second-biggest economy has weakened rapidly.
Beijing has escalated support in recent weeks to reverse a liquidity squeeze that has choked the real estate market, which accounts for a quarter of the Chinese economy and has been a major driver of growth.
Out Of Options
At the trust unit of state-owned China Construction Bank (CCB) and Zhongrong International Trust, formerly one of China’s biggest shadow bankers, investing like private equity and venture capital funds have become more popular, and two people with first-hand knowledge of the companies said.
CCB Trust plans to invest in top companies in niche fields; it recently invested in Beijing Tianyishangjia New Material Corp, which makes materials used in train brakes, said one employee at the company.
Zhongrong International Trust has been collaborating with local governments, including Qingdao provincial authorities, to acquire early-stage deals in intelligent manufacturing, an executive there said.
Jiangxi-based Avic Trust has been investing in waste-processing companies, including financing photovoltaic power stations that it then leases out, said a person with first-hand knowledge. CCB Trust, Avic Trust, and Zhongrong International Trust would not reply to requests for comment.
In several cases, trust firms are purchasing projects from struggling developers and appointing new managers to recover their losses, according to corporate records and three people in trust firms with knowledge of such acquisitions.
Ping An Trust, Everbright Xinglong Trust, Zhongrong International Trust, and Minmetals International Trust have all purchased projects from struggling developers in the past few months, based on corporate records and company announcements.
Ping An Trust, Everbright Xinglong Trust, Zhongrong International Trust, and Minmetals International Trust would not reply to requests for comment.
For Hao and other former trust employees, the companies’ search for stability seems familiar.
“My situation now is better than it was when I left the trust, but will never be as good as it was at the height of the boom when I was there,” Hao said.
($1 = 6.9905 Chinese yuan renminbi)
