Analysis: Beijing targets trusts to stem shadow banking risks

Fri Jan 20, 2012 2:54am EST
 
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By Zhou Xin and Nick Edwards

BEIJING (Reuters) - China is intensifying its cat-and-mouse pursuit of the 4 trillion yuan ($635 billion) investment trust industry, with credit risks on the rise as economic growth slows.

The watchdog of the country's 60-strong trust investment firms, the China Banking Regulatory Commission (CBRC), has made clear its disdain for the risks that off-balance sheet lending pose to the financial system, banning trust programs focused on bank-accepted commercial paper.

But Beijing's bans are a way of life for financiers constantly looking for the loopholes in China's tightly-controlled credit markets.

"Trust firms really know how to live with harsh regulation -- when one thing is banned, they can quickly find a new thing and make it big before regulators notice it," Li Yang, the chief analyst for Use Trust, a trust-focused consultancy in Chinese city of Nanchang, told Reuters.

Trust firms raise private capital fund vehicles, typically from high net worth individuals, working hand-in-hand with banks to find investors and distribute products.

Their emergence has been particularly appealing to China's big state-backed lenders who can use trust products to put deposits to work off-balance sheet, bending rather than breaking the rules on strict lending limits laid down by Beijing.

The seemingly-permanent shortage of official bank loans for the small firms that generate around 80 percent of the jobs in China, as well as negative real interest rates on bank deposits, has generated soaring demand for trust products.

Annual yields of 9 percent versus bank deposit rates of 3.5 percent and inflation that averaged 5.4 percent in 2011 have tempted a wide range of investors, even those who struggle to meet minimum investment rules of millions of yuan, designed to keep the general public out of the often risky enterprises.   Continued...