China shuts loophole on non-standard credit to property and infrastructure sectors

China has banned non-bank financial institutions from channelling funds into the property and infrastructure sectors via entrusted loans, closing an important loophole for non-traditional financing.

Verbal instructions from securities regulators stipulate that new collective asset management plans (AMPs) designed to invest in entrusted loans, trust loans and other credit assets can no longer register, separate sources confirmed with the South China Morning Post.

In addition, the regulations stipulate that existing products won’t be extended after maturity, while one-on-one AMPs have to report the specific source of their funds.

The verbal instructions are issued by Asset Management Association of China, a self-regulatory association of fund management companies in China, under China Securities Regulatory Commission’s order, sources said. The association did not reply to requests for comment.

The guidance closely followed a new rule by the China Banking Regulatory Commission designed to curb a popular form of shadow banking activity.

Entrusted loan, in which a bank acts as an intermediary to arrange and administer financing between a borrower and lender – is the sole mean for AMPs to allocate funds to end borrowers, mainly local government financing vehicles and property firms that are restricted from accessing financing via bank loans and bonds. Banks are the major investors of AMPs. But these investment vehicles can also raise funds from other channels, and then invest in what known in China as non-standardised credit assets.