China’s Trust Loans Risk Repeat of Late 1990s Implosion, while Sovereign Wealth Fund Assumes Bank Risk

October 10, 2011


A Hong Kong baby formula manufacturer invested 2 years worth of profits in Yunnan Trust. The money was then funneled to Hunan Nonferrous Metals, Chenzohou Diamond Tungesten,Products, and Hunan Bismuth Industry.  No collateral was given in return. The transaction raised concerns that companies are again reaching for yield amid negative real interest rates by investing in Trusts, risking a repeat of the 1990s debacle.

The result [of negative real interest rates] has been an explosion in trusts and similar investment vehicles.  As Shai notes, non-bank lending has grown from just 4% of loans in China in 2002, to an estimated 55% this year — which means that the supply of credit in China is more than double the official reported figures. This is actually the second ”trust boom” that China has seen in recent years.  The first one came to an ugly end in the late 1990s, when numerous trusts imploded, including the Guangdong International Trust and Investment Co. (GITIC) which defaulted on $200 million in bonds, many of them held by foreign investors — the largest bankruptcy China has seen to date.

As Shai points out, almost half the money managed by Chinese trusts is invested in infrastructure and real estate projects, and trust loans to real estate developers has catapulted 150% from RMB 235 billion in March 2010 to RMB 605 billion today.

Meanwhile, China’s sovereign wealth fund announced investments into it’s four largest banks, joining US and Europe in socializing bank risks. Expect this ponzi maneuver to manifest itself in the sovereign credit and currency markets.  

Source : Chovanec, Zerohedge

Further Reading : Lessons from The 1997-1998 Asian Financial Crises


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