New dangers lurk in trust firms' rush to finance

A new financial danger is emerging on the mainland, with dozens of under-regulated trust companies channelling funds from clients and bank wealth management products into a range of capital-hungry companies and overexposed local government financing vehicles.

Problematic borrowers began turning to the trust firms last year when banks and bond markets tightened scrutiny over such loans.

Thanks to the premiums that such borrowers are prepared to pay, the trust companies have been able to attract clients with expected annual returns of over 10 per cent, sharply higher than the 3 per cent benchmark interest rate for one-year deposits. As of the end of December, their total assets under management surged by about 46 per cent year on year to more than 7 trillion yuan (HK$8.62 trillion), surpassing the insurance sector for the first time.

The trust sector, now ranked second only to banks in terms of assets under management, is supervised by the non-bank financial institution division of the China Banking Regulatory Commission, unlike banks, securities companies and insurers, which fall under the supervision of powerful industry regulators.

"Many companies are queuing up to get financing from us," said Nina Zhao, an executive of a trust company in Beijing. "We have no time to look into the projects for which they are raising funds. As long as they have land or property as collateral, we give them the money."

Trust companies made 1.29 trillion yuan in new loans last year, 1.09 trillion yuan more than the 2011 total, according to the People's Bank of China.

Many borrowers turned to trust companies after banks rejected them over concerns about the security of cash flows from unprofitable projects of local government financing vehicles and the solvency of industries that are either subject to regulatory crackdowns, or burdened by oversupply.