Trusts, Bonds Lead Surge in Credit 'Gambling' Go back »

2012-10-26 | All chapters

(Beijing) – Default risks seem remote among local government financing platforms that have raised trillions of yuan since last year via trusts, bank-sponsored wealth management products, securities and bonds – and plan to borrow a lot more.

Most borrowers and lenders converging inside this unconventional credit circle, which has widened dramatically since 2011 in the face of bank loan limits imposed by the central government, are wearing a happy face.

Borrowers include government officials getting the capital they need for GDP-boosting infrastructure projects. Investors include wealthy individuals, brokers and other investors enjoying decent returns. Banks, too, are benefiting as middlemen.

Since local governments guarantee these lines of credit, an unspoken assumption is that higher levels of government – even the central government in Beijing – stands ready to step in and rescue any financing platform that might teeter toward default.

But some financial experts say these nothing-can-go-wrong assumptions, although popular, may be wrong. It's also been argued that anyone looking closely at non-bank institutional lending will find dangerous cracks in the system.

Some experts say if the non-bank credit system collapses, the impact on China would rival the fallout from the subprime mortgage crisis four years ago in the United States, which shattered borrowers and financiers.

Trouble could be triggered by an extended slowdown for economic growth in China. This year's GDP expansion rate is expected to dip below 8 percent for the first time since 2004, and could slow further next year.

Bank of China Chairman Xiao Gang, writing recently in the state-run China Daily newspaper, said wealth management products are raising liquidity risks in financial markets. He's particularly concerned about products that mature in less than a year but put money into long-term infrastructure projects linked to local governments.

Economic growth is needed to keep the ball rolling and defaults at bay, particularly since the credit system's institutional oversight and government supervision are relatively thin compared to Beijing's regulation of banks, said Liu.

"The game can continue because every party involved is unqualified" for standard, regulated bank credit, said Liu Yuhui, chief economist at Huatai Securities. "Both investors and fund-raisers lack self-regulation.

"Everyone is gambling."

Risk or No Risk?

Some 5.5 trillion yuan was raised through trust funds over the past year, according to the China Trustee Association. About 22 percent of that money was earmarked for infrastructure projects.

So far, the default rate for this enormous and growing credit pool managed by trusts – the nation's third-largest lending network, behind only banks and insurance financing – has been zero.

Urban bond sellers and buyers have been busy as well. A combined 471 billion yuan was raised through 401 bond projects between January and September, according to the market data firm Wind Info, compared to about 425 billion yuan raised during the whole year of 2011. Most of the money went toward roads, bridges and other urban construction projects.

Source: Caixin