SHANGHAI/HONG KONG — For more than a decade, the debt-fueled construction boom of Chinese developers enriched the country’s shadow banks, eager to capitalize on the needs of an industry desperate for credit and too risky for traditional lenders.
Now, following a government crackdown on real estate company debt, that credit demand has collapsed — and with it the largest source of revenue for shadow banks, also known as trust companies.
China’s shadow banking industry – worth about $3 trillion, about the size of Britain’s economy – is looking for new business, including direct investment in companies, family offices and wealth management.
It’s also shrinking as once-high-paying employees move to other jobs after scouting for new deals. The plight of the industry stands in stark contrast to China’s main financial firms, which have not yet been seriously hit by the crisis.
“Everyone ate a bite of rice and survived another day,” said Jason Hao, who quit his job at a Shanghai trust company earlier this year after his salary dropped from up to 4 million yuan ($570,000) a year to about 240,000 yuan had dropped ($34,000).
Today he works for an asset management company.
Data from industry tracking website Yanglee.com shows that 1,483 real estate-related escrow products were sold in 2022 through the end of September, down 69.7% from 4,891 in the same period last year.
The value of deals in 2022 was 117.2 billion yuan, down 77.9% from 531.3 billion yuan. Real estate products accounted for 8.7% of all fiduciary products in September, compared to about 30% in the same month of the last two years.
The National Audit Office and China’s banking regulator this year checked both trust accounts and deals for risks, three people with knowledge of the matter said.
The National Audit Office and the CBIRC did not respond to requests for comment.
At an internal meeting in October, an executive at Shanghai Trust, a state-owned company that once focused on real estate, said revenue this year fell by almost half from a year earlier, according to two people with direct knowledge of the meeting .
The company plans to focus on wealth management and family offices to shore up its finances while moving away from developer lending, which was once its core business, one of the people said.
Shanghai Trust did not respond to requests for comment.
The number one priority for all trust companies now is “how to transition what will make you survive,” said another trust company employee who, like other current employees interviewed for this article, declined by name because of the sensitivity of the matter to become.
RISK OF CONTAGION
Trust companies have been labeled “shadow banks” because they disregard many of the rules that govern commercial banks. Banks in China sell wealth management products, the proceeds of which are channeled through trust companies to property developers and other sectors unable to access bank financing directly.
Because of the risk, shadow banks could charge interest rates as high as 18%, well above the typical 2% to 6% seen for banks at the height of the boom.
Concerns about overexposure to real estate developers have grown this year as the embattled sector in the world’s second largest economy has slowed rapidly.
Beijing has stepped up support in recent weeks to reverse a liquidity squeeze that has choked off the real estate market, which accounts for a quarter of China’s economy and has been a key engine of growth.
At the trust unit of state-owned China Construction Bank (CCB) and Zhongrong International Trust, formerly one of China’s largest shadow banks, investments such as private equity and venture capital funds have become more common, said two people with direct knowledge of the companies.
CCB Trust wants to invest in leading companies in niche fields; It recently invested in Beijing Tianyishangjia New Material Corp, which makes materials used in train brakes, said a person who works at the company.
Zhongrong International Trust has worked with local governments, including Qingdao provincial authorities, to secure early-stage smart manufacturing deals, a local executive said.
The Jiangxi-based Avic Trust has invested in waste processing companies, including financing photovoltaic power plants, which are then rented out, said a person with direct knowledge.
CCB Trust, Zhongrong International Trust and Avic Trust did not respond to requests for comment.
In some cases, trust companies buy projects from troubled developers and hire new managers to make up for their losses, according to company records and three people at trust companies who are aware of such acquisitions.
Ping An Trust, Zhongrong International Trust, Everbright Xinglong Trust and Minmetals International Trust have all bought project companies from troubled developers in recent months, company records and company announcements showed.
Ping An Trust, Zhongrong International Trust, Everbright Xinglong Trust and Minmetals International Trust did not respond to requests for comment.
Mr. Hao and other former fiduciary employees are familiar with the companies’ search for stability.
“My situation is better now than it was when I left the trust, but it will never be as good as it was at the height of the boom when I was there,” Mr Hao said. – Reuters