For over a decade, the debt-fueled construction boom by Chinese developers enriched the country’s shadow banks. They were keen to capitalize on an industry that was desperate for credit but too risky for traditional lenders.
In the aftermath of the government’s clampdown on the debt-bingeing real estate companies, credit demand is now in decline. This has also led to the collapse of the largest revenue stream for trust banks (also known as shadow banks).
China’s shadow banking sector – valued at $3 trillion and roughly equivalent to Britain’s economic size – is looking for new business. This includes direct investments in family offices, companies, and asset management.
The industry is shrinking as well, with many once highly paid employees moving on to other positions after finding new jobs. This is in stark contrast to China’s major street financial institutions, which have not been adversely affected by the crisis.
Jason Hao left this year’s job at a Shanghai trust company after his salary dropped from 4 million Yuan ($570,000) to 240,000 Yuan ($34,000).
He now works for an asset management firm.
Yanglee.com data shows that 1,483 trust products related to real estate were sold between September 2022 and September 2023, a decrease of 69.7% compared with 4,891 in the same time last year.
It was worth 117.2 billion Yuan, which is 77.9% less than the 531.3 billion Yuan. 9.7% of trust products were made up by real estate, as opposed to 30% for the previous two years.
Three people familiar with the situation said that both China’s bank regulator and China’s National Audit Office have been reviewing trust-firm accounts and transactions this year in order to assess risk.
CBIRC and National Audit Office did not respond when asked.
According to two persons with direct knowledge, in an October meeting, an executive from Shanghai Trust (a state-owned company that used to be focused on real estate), stated that revenue had fallen by nearly half this year.
One person said that the firm will focus its efforts on family offices and asset management to strengthen its financial position, while avoiding lending to developers which was once its core business.
Shanghai Trust declined to comment on requests.
According to another employee of trust firms, the top priority is now “how do you transition? What will allow you to survive?” This was the same as the statement made by the current trust company employees. The sensitive nature of this matter meant that they could not be identified.
Because trust firms operate outside of many rules that apply to commercial banks, they were called “shadow banks”. China’s banks sell wealth management products. The proceeds are funnelled to trust companies by property developers or other sectors who are not able to access bank financing directly.
Shadow banks may charge higher interest rates than banks during boom times due to the increased risk.
As the second largest economy in the world has been slowing, concerns about excessive exposure have increased.
Beijing is offering support to reverse a liquidity crunch that had hampered the Chinese real estate market. This sector makes up 25% of China’s economy, and has historically been an important driver of economic growth.
Two people familiar with the situation said that private equity and venture capital investments have become more popular at the trust unit of China Construction Bank (CCB), and Zhongrong International Trust.
CCB Trust is looking to invest in companies that are leaders in their niches. It recently made an investment in Beijing Tianyishangjia New Material Corp. This company manufactures materials for train brakes.
Zhongrong International Trust is working closely with Qingdao province authorities to find early-stage deals in intelligent manufacturing.
According to a source with direct knowledge, Jiangxi’s Avic Trust had been investing in companies that process waste, as well as funding photovoltaic power plants, which it rents out.
CCB Trust. Zhongrong International Trust. Avic Trust
Responded not to our requests for comment.
According to trust firm records, some trust companies are purchasing projects from distressed developers, and then hiring managers to recover their losses.
Ping An Trust (Zhongrong International Trust), Everbright Xinglong Trust, Minmetals International Trust, and Everbright Xinglong Trust all purchased project companies from struggling developers over the past few months according to corporate records and announcements.
Ping An Trust. Zhongrong International Trust. Everbright Xinglong Trust.
Minmetals International Trust declined to comment.
Hao, along with other trust workers, feels the same way about companies looking for stability.
Hao stated that “My situation is now better than when I left trust but it will never be the same as at the peak of the boom when it was mine.”