Shifting risks: Trust firms cheer latest China WMP crackdown

Tue Aug 2, 2016 7:16pm EDT
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By Engen Tham and Shu Zhang

SHANGHAI (Reuters) - Lightly regulated trust companies are hoping for a windfall from China's latest effort to crack down on risky wealth management products (WMPs), which could see a flood of money diverted to them from rivals shut out of the market by the new rules.

Draft rules circulated by the banking regulator would curb the exposure of WMPs to riskier assets like stocks, and could also hamper the sale of structured products that increase leverage in the financial system.

The regulations are seen weighing heaviest on smaller banks and brokerages - whose shares have been hit - although the reaction from trusts suggests they may merely shift some risk rather than eliminating it.

"A trust license is suddenly worth a lot now," said a source at one of China's top three trust companies. "All our competitors can't do structured products, we still can."

Trust companies are non-bank lenders that raise funds by selling high-yielding WMPs and use the proceeds to invest in everything from equities to commodities and fund loans to risky borrowers to whom banks are reluctant to lend.

Chinese authorities have taken a number of steps in recent years to try to control the growth of WMPs amid mounting concerns about the level of debt, and in particular the rapid expansion of off-balance sheet lending, in the world's second biggest economy.

As the economy has slowed to its slackest pace in 25 years, smaller banks with less access to top-tier creditworthy borrowers have increasingly dabbled in creating, packaging and repackaging exotic assets for sale to retail investors, who assume they are tacitly guaranteed by the government.

The scale of bank WMPs hit 25 to 26 trillion yuan ($3.91 trillion) in June, according to investment bank CICC, an increase of 8 percent from the beginning of the year.   Continued...

Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. REUTERS/Kim Kyung-Hoon