Industry waiting for first trust company to default in China
Financial leaders are wondering if the authorities are genuinely willing to allow such companies to default, a scenario that has yet to happen
Global financial leaders are still waiting patiently for a trust company on the mainland to go belly up - as a small signal that the central government is getting serious about better allocating credit.
"What's happened in the eight months of this year - for us looking on from outside the Chinese financial system - is a lot of backwards and forwards on whether the Chinese authorities are really willing to go towards [allowing trust companies to default]," Jonathan Adair Turner, a member of Britain's Financial Policy Committee, said at the World Economic Forum in Tianjin yesterday.
"There was a lot of excitement in January about a wealth management product … which looked like it could be about to default. But then at the end of the day it was a tiny default, a relatively small haircut."
Analysts had projected this year that mainland regulators would give in to market pressures and allow a spectrum of failing trust firms to perish. Indeed, by the end of July, mainland media had reported on nearly 60 potential defaults as wealth management products matured, Bank of America Merrill Lynch reported.
Still, no trust companies have been allowed to default, a trend that not only supports continued rapid growth in the highly risky wealth management market, but stops investors from pricing risk into the market.
"Today, pricing risk in China is fairly difficult," Nicolas Aguzin, Asia-Pacific chairman and chief executive at JP Morgan Chase, said during the forum. "It's not exactly clear where the risk lies. It's not clear if it's in the trust companies, the financial institutions or the investors."