More Trust Companies in Danger; Shadow Banking Contracts as Investors Shun Risk

Data on shadow banking from 2013 was released this week, but outside of some Chinese sources, the media isn't covering the drop in fundraising last month:
China Trust Assets Surge to $1.8 Trillion Amid Default Risks
Chinese Investors Shrug Off Risks As $1.8T Trust Industry Sees First Failure

The news of a potential (now confirmed) trust default came in January, so 2013 data was unaffected by the news. On February 7, I posted: Chinese Credit Contraction: Fundraising for Chinese Trust Products Drops 62% in January (Updated); Deposit Insurance Savior or Death Knell?, which covered reports that trust fund raising fell 60% or more in January.

China Trusts' Road to Bust

It's also possible authorities will let investors take a bigger hit. Even if not, more distressed trust situations are inevitable and will test Beijing's resolve. Bernstein Research estimates that about 40% of the about 10 trillion yuan in trust products outstanding will mature this year. The trust companies themselves are thinly capitalized, with an equity base equivalent to 2.6% of assets under management. A feedback loop could form: Investors steer clear of new trust products, and trust companies are then unable to roll over old loans to stressed borrowers, causing more defaults.

These firms need to rollover 40% of the products in 2014, but their fundraising levels were down 60% in January. If those numbers held up for the rest of the year, the shadow banking industry would see significant contraction. Last year, assets rose 3.4 trillion yuan. At a fundraising rate at 40% of last year, trusts would only raise another 1.3 trillion. If every investor who sees their trust mature in 2014 rolls it over, credit growth will slow to about 10 percent. If there are redemptions, the trust sector could contract.

The Chinese media is on top of the story, reporting that several trust companies are in deep trouble due to the Liansheng default: 多家信托公司深陷联盛债务危机

Reuters picked this story up quickly so there's a good English version: Six China shadow banks threatened with default over coal firm exposure: paper

Six Chinese trust firms have lent more than 5 billion yuan ($824.6 million) to a delinquent coal company, state media reported on Friday, raising the prospect of further defaults in China's so-called shadow banking system.

In addition, investors in a trust product already in default have pledged to seek repayment not only from the trust firm itself, but also from China Construction Bank (CCB) (601939.SS) (0939.HK), the country's second-largest lender, which acted as sales agent for the high-yield investment products issued by Jilin Province Trust Co Ltd.

There isn't going to be a trust fundraising revival in February now that default will remain in the headlines.

The collapse in fundraising is distorting the affecting the wealth management product market. Note the trend and the interest rate spread between wealth management products (WMPs, not trusts) offered by small and medium banks

Interest rates on WMPs are falling as investors turn to these less risky products (as opposed to trusts), also interest rates for large banks are falling faster than small and medium banks. Investors are shunning risk.