2014-02-07

Chinese Credit Contraction: Fundraising for Chinese Trust Products Drops 62% in January (Updated); Deposit Insurance Savior or Death Knell?

The link below takes you to the Google Translated article, but it screws up the numbers, so here they are:

52 firms issued 228 products in January. The amount collected fell 65% from December levels (mtm) and and 55% from prior year January (yoy). The average size of the individual trusts fell 18% mtm and 21% yoy. Raw numbers: ¥42 billion down from ¥120 billion January 2013.

55 firms established 245 new trusts in Janaury. The total amount was down 77% mtm and the average size was down 38%. Year on year, the size was down 62%. Raw numbers: ¥28 billion down from ¥122 billion in December and ¥74 billion in January 2013.

The average yield on trusts issued/created in January is 8.65%, down from 8.81% in December and 9.08% in January 2013.

Of the trust products themselves, real estate was the largest with 37% of the market by yuan value across 55 products, along with the longest maturity at 2 years and the highest yield at 9.66%. Industrial and commercial firms were 19% of the market by yuan value across 45 products and an average yield of 8.53%. Basic industry trusts accounted for 16% of the market across 29 products, with an average yield of 9.52%.

Trusts comprised of project loans made up 33% of the market with average yield of 9.07%. Other investment projects offered 7.77% yields; equity trusts offer 8.89% yields; while trusts with equity shares are 16% of the market and offered the highest yield at 9.69%.

Economic data is going to take a major hit in February and March if this contraction in credit does not rebound or is not offset by bank loans. If I went only by this data, I would expect the February PMI to be far lower than expected.

Collection of the first month of fund-raising amount of trust to drop 62%

A story that could have an impact on whether the government allows trust products to fail or not is deposit insurance. In today's news (Google Translated): The establishment of a deposit insurance system're just "finishing touches". In short, deposit insurance is still set to launch this year.

English coverage here (from December): China Pushes Ahead on Deposit-Insurance Plan

Key part:
China is signaling that it is close to insuring a big chunk of its roughly $17 trillion in bank deposits, a key move toward opening up its financial system but one that carries risks for lenders big and small.

The aim is to reassure depositors that their money is safe as the nation moves to allow more competition in the financial system. That could be bad news for China's big state-run banks, which already enjoy the implicit backing of Beijing but would have to pay for it under a new deposit-insurance program.
The seen effect of deposit insurance is that it makes depositors feel safer, but Chinese already assumed a government guarantee even for risky trust products. The unseen risk is two fold (leaving aside the argument that deposit insurance leads to risk taking). First, the government may allow trust products to fail because they assume the deposit insurance will shore up the system, but deposit insurance does nothing to address the current problems with shadow banking. Second, (but maybe first in order of events), depositors previously viewed deposits and trusts as guaranteed. The default in January shattered that idea, but after there is explicit insurance on bank deposits, but not trusts, it will again highlight the difference. The marginal investor concerned about risk will move out of trusts and into bank deposits in the wake of deposit insurance, which is contractionary (deflationary) for total credit.

Update: Still no coverage in the English press on the drop in fundraising. I noticed this post on FTAlphaville when searching for news though, a counterpoint to the negativity on trust defaults: More China trust defaults likely but beware hype
The higher risk activity of trust companies is concentrated in a small portion of assets under management – around Rmb2.36tn ($390bn), not the Rmb10tn that is often claimed.

One thing I didn't include above were the raw numbers from the article, which I have now added. The numbers are very substantial relative to the size of market, considering that in January 2013, trusts had raised or established trusts worth nearly ¥200 billion (from the article), but in January 2014 they raised ¥70 billion. Annualized, that is the difference of ¥2.4 trillion versus ¥850 billion. Even if this drop off were solely in the smaller riskier portion of the market, the implications for the most marginal borrowers would be the same. Subprime was "contained" in the words of Ben Bernanke.

Also from the comments on that FTAlphaville post:

The chart shows late 2013 growth in WMPs (a separate product from trusts as explained below) was driven by higher risk products, a feature of late stage credit bubbles.
Q. What exactly is a Chinese “trust” and how is it structured?

A trust is essentially a private placement of debt. Investors in the trust must meet certain wealth requirements (several million RMB in assets would not be unusual, so the investors are either high net worth individuals or corporates) and investments have a minimum size (e.g. RMB 1mn). The appeal is a much higher yield than can be obtained through conventional bank deposits, in many cases 10% or higher, versus regulated multiyear bank term deposit rates in the low single digits. Trusts invest in a variety of sectors, including various industrial and commercial enterprises, local government infrastructure projects (via LGFVs), and real estate.

As our banks team noted, 29% of trust assets are invested in higher-risk industrial or commercial sectors.

A trust is not to be confused with a “wealth management product” (WMP). WMPs are available to a broader group of individuals, with much smaller minimum investments. They are typically sold through and managed by banks or securities brokers, with or without a guarantee of the payment of interest or principal (WMPs featuring explicit guarantees are booked on banks’ balance sheets; for other non-principal guaranteed products, implicit guarantees may be assumed by some investors). Funds from WMPs may be invested in a range of products including corporate bonds, trust loans, interbank assets, securitized loans, and discounted bills—so WMPs are best thought of as a “money market fund” or pool for other financial products.

I also managed to find some charts showing the growth slowdown in Chinese wealth products, as of January 26. New data may not be out for another week since the country shut down on January 31 and went back to work on February 7.

This chart shows the past 10 weeks of activity. The red bars are newly issued trusts estimated value and the blue line is the number.


This is the same chart, but for newly established trusts.

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