China economy threat: Trust company bankruptcies will be “bigger than Evergrande”
China’s three trillion dollar trust industry could be on the brink of collapse, with sources telling Asia Markets a catastrophic wave of Chinese trust company bankruptcies is likely in the coming months.
It’s another major threat to the slowing China economy.
Chinese trust companies generally operate across multiple asset classes including stocks, bonds and private debt. The major problems within the sector are said to lie in their private debt operations.
The Asia Markets source says despite warnings from Chinese regulators in recent years, trust companies have continued to lend money to real estate developers, in order to generate higher yields on risker loans.
The problem is Trust executives were banking on a bounce-back in China’s property sector, which has not eventuated.
“The large trust companies invest on behalf of some of the wealthiest Chinese families and largest corporations and their staff, so what we’re about to see could be certainly bigger than Evergrande, in term of the ramifications within China,” the Hong Kong-based source said.
In August 2022, as the Evergrande crisis unfolded, China’s National Audit Office announced it had undertaken surprise audits of at least 20 trust firms.
According to Bloomberg sources at the time, the firms were asked to report on their risky loans to real estate developers and encouraged to dispose of them.
It has since been revealed that at least two Chinese trust companies, including MinMetals Trust Company and the Zhongrong Trust Company purchased stakes in 10 troubled real estate projects during 2022, despite the warnings from regulators. But there were likely many more.
During 2022, it is now known Chinese trust companies defaulted on over 90 billion yuan in property-related investments.
Here are the most likely Chinese trust companies to collapse
State media recently revealed a state-owned bailout venture known as the China Trust Protection Fund has been set up to acquire risky assets from trust companies.
It comes as the New China Trust Company was declared bankrupt in May this year. It marked the first Chinese trust company bankruptcy in over two decades.
Today, there remains a large number of big Chinese trust companies holding a staggering amount of bad assets.
Caixin has revealed the 10 Chinese trust companies with the most distressed debt on their balance sheets. They are:
- China Minsheng Trust – 65% (of balance sheet allocated to bad loans)
- Sino-Australian International Trust – 54.4%
- Kanlun Trust – 51.8%
- Wanxiang Trust – 51.7%
- Hangzhou Industrial and Commercial Trust – 35.4%
- JIC Trust – 35.2%
- Huachen Trust – 33.9%
- China Industrial International Trust – 29.9%
- Shanxi Trust – 15.9%
- Dongguan Trust – 15%
Implications for global markets
Harvard Economist, Shirley Ze Yu warned the state of China’s trust industry must be taken seriously by global investors.
“China’s liquidity crisis, spreading from real estate developers to trust funds, starts to feel like the real estate-triggered US Great Recession,” she said.
“The root cause of China’s economic slump is confidence, confidence, and confidence – a lack of confidence from consumers, private businesses, and international companies.”