Regulatory reforms and credit defaults in the property sector are pushing Chinese trust companies to look for new ways to survive in the harsh business environment.
Trust financing has been a major business for many trust entities, which provide clients with cost-efficient financing via trust platforms. Many of their clients, especially those with huge demand, are property developers.
However, the real estate market has turned cold over the past 12 months as regulators crack down on the highly leveraged sector, pushing many big players like Evergrande into credit crises.
Trust companies themselves are having a tough time. As a result of the asset management regulatory reform of 2018, they have been reducing non-standard debt assets, shadow banking activities, and trust financing businesses.
When asked about the business outlook, an executive from a Chinese trust company says, “Find a new business model – that is the only goal for us in 2022. We need to find a way to survive.”
Quite a few trust entities have expanded rapidly by lending massively to developers. “We were acting like banks, lending a lot,” the executive admits. "However, the number of defaults happening recently is giving us a headache.”
The market predicts the property downturn will likely continue towards the second half of this year. "The real estate market is so depressed that we have to change the old model," the same executive says. “This whole sector needs a completely different ecosystem.”
Amid growing pressure on the business, many trust companies have seen significant turnovers at the management level recently. The China Banking and Insurance Regulatory Commission have recorded more than 160 such cases for 2021, involving chairmen, chief executive officers, chief risk officers, general managers and other senior executives. Over 20 trust companies have changed their chairman or CEO, and about 70 have reshuffled more than half of the members of their management teams.
Unsurprisingly, trust financing has seen assets under management (AUM) decline to 3.86 trillion yuan (US$606.5 billion) as of the third quarter of 2021, from 4.86 trillion yuan in Q3 2020, data from the China Trustee Association (CTA) show. The overall AUM of Chinese trust entities shrank to 20.44 trillion yuan in Q3 2021, down 22.11% from the end of 2017.
Analysts predict that the pressure on trust entities will continue this year. There are no signs the regulatory environment will ease anytime soon; more than 20 penalty cases involving trust companies were recorded in 2021, three times more than last year.
Things are not totally bleak. With more trusts building up their standard products business, such as fund trusts investing in the securities market, analysts expect the sector to recover gradually. According to the CTA, the AUM of such trusts has increased 38.12% year-on-year as of Q3 2021.