China likely to survive this year's peak season of maturing property trust funds

Firms heighten risk controls due to heavy inventories, slowing economy

PUBLISHED : Wednesday, 16 September, 2015, 12:30am
UPDATED : Wednesday, 16 September, 2015, 12:30am

China has largely defused this year's 67.9 billion yuan of maturing property trust products, but analysts warn default risks linger as inventories remain high despite quickening sales.

In the first half, payments on six property trust funds were delayed, while so far this quarter, there has been only one.

"But risks will remain for a while, as property firms are suffering high stocks while the broader economy is slowing," said Shuai Guorang, a senior researcher at specialist trust financing consultancy User-Trust Studio.

Data from his firm showed property trust products due in the last quarter will fall to 63 billion yuan, then 61 billion yuan in the first quarter of next year and 47 billion yuan in the second quarter. Meanwhile, new issuance fell from 47.5 billion yuan in this year's first quarter to 41.9 billion yuan in the second quarter and 31.7 billion yuan so far in the third quarter.

"Trust firms are heightening risk control over their exposure to the property sector," Shuai told the South China Morning Post. "Those who used to be aggressive in such business have exercised rising caution."

That is squeezing the funding line for small developers, who have long been shunned by banks and thus become more vulnerable to hiccups in sales. The big rivals will then take the chance to snap up valuable land reserves from them.

Developers offered some of the trust industry's highest expected returns to attract investors. For example, a 20-million-yuan two-year trust fund to finance a property project in Jinan in Shandong province gave the highest yield of 12 per cent. Two other property trust products were among the top 10 most expensive schemes in the first half, according to User-Trust Studio.

Data from the China Trust Association showed the proportion of property trust products in all new issuances declined for six consecutive quarters to 6.8 per cent at the end of June, the lowest in at least two years.

The outstanding amount hovered around a record high of 132.3 million yuan, but the percentage in all products issued by trust firms fell to 8.9 per cent as of the end of June, also the lowest in at least two years.

Such a trend is in line with the country's slowing real estate investment and developers' falling appetite to replenish land reserves.

Wu Jianbin, chief financial officer of Chinese developer Country Garden, told the Post smaller developers may have difficulties in generating sales as scheduled from projects funded by these trust products, in which case banks or courts would then seize the assets for public auction to repay debts.

"There won't be systemic risk, as sales are improving now," he said.