Financial regulation

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

PUBLISHED : Friday, 12 January, 2018, 2:11pm
UPDATED : Friday, 12 January, 2018, 10:58pm

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.

“The ban on using funds from the plans from brokers, fund management subsidiaries and private funds for entrusted loans will effectively put an end to the most popular structure for non-standardised credit assets,” wrote Richard Xu, a China financial sector analyst with Morgan Stanley, in a research note.

He estimated about 70 per cent of China’s 15 trillion to 20 trillion yuan (U$$2.32 trillion to US$3.09 trillion) entrusted loans and trust loans ultimately reached financing vehicles and property firms.

China’s ban on entrusted loans to set to end a popular form of shadow financing

An earlier rule in December banned trust firms acting as an intermediary to channel funds. About 56 per cent of China’s 13.6 trillion yuan trust plans are intermediary business, according to the China Trustee Association.

Data from the Asset Management Association of China showed by the end of November, the outstanding value of collective AMPs managed by securities firms totalled 4.35 trillion yuan, while the value of one-on-one AMPs exceeded 25 trillion yuan.

One-on-one AMPs can still invest in entrusted loans and non-standardised credit, but they have to report to authorities and make sure the trustees use their own money, sources said. But under heightened pressure, some trust plans have taken pre-emptive compliance measures such as halting all intermediary businesses.