Former Bridgewater, UBS analyst who called Chinese bank turmoil says US$2.9 trillion trust industry is next
- Jason Bedford says most Chinese trust firms are ‘deeply distressed, potentially with their capital solvency at risk’
- Missed payments from Zhongrong International sparked protests earlier this year, while the industry saw its first bankruptcy in May when New China Trust folded
The analyst who predicted the troubles that cascaded through China’s regional banks four years ago now has similar warning for the nation’s US$2.9 trillion trust industry.
Many of these firms are “deeply distressed, potentially with their capital solvency at risk”, said Jason Bedford, a former analyst with Bridgewater Associates and UBS Group.
Bedford made his name by issuing early warnings about troubles roiling China’s smaller banks after combing through nearly 250 financial statements. He has now done the same for China’s trust firms, a corner of the country’s shadow banking sector that can offer returns several times that of a bank deposit.
Of the 55 trust companies that issued financial statements for 2022, 14 reported non-performing and special mention assets that topped one third of their total assets, according to Bedford’s calculations. Many of the 13 firms that did not report could also be in trouble, he said.
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The National Administration of Financial Regulation, which oversees trust firms, did not respond to a request for a comment.
Cracks have already appeared in the sector which has lent extensively to troubled real estate developers. Missed payments from Zhongrong International Trust sparked protests earlier this year, while the industry saw its first bankruptcy in May when New China Trust folded.
Trusts typically take deposits from wealthy individual investors and companies to make investments in stocks, bonds and others assets, including loans to firms that cannot access traditional banks. Trusts, which operate with fewer regulations than banks, account for almost 10 per cent of total loans in China, according to Bloomberg Economics.
While Zhongrong did not display the typical stress indicators, with distressed assets representing just 3.7 per cent of total assets last year, its problems appear to stem from the broader Zhongzhi Enterprise Group and its possible role in raising financing that was potentially rolling over other products, said Bedford.
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China this month opened a criminal investigation into the money management business of Zhongzhi, just days after the shadow banking giant revealed a shortfall of US$36.4 billion in its balance sheet.
In recent years, even as rival trusts pared risks, Zhongzhi and its affiliates, especially Zhongrong, extended financing to troubled developers and snapped up assets from companies including China Evergrande Group.
Compared with banks which have a relatively uniform business model, trust companies are much more varied.
“While some have a future, the era of high-interest rate lending to real estate developers, which has long been a mainstay for many trust companies, appears over,” said Bedford.
