2014-04-13

Entire Trust Market Sales Have Collapsed, Not Just Real Estate Trusts

Trust fundraising fell 40% in Q1. That link goes to a post from April 7, when the Chinese media covered the story. It was clear a major slowdown was in the works months earlier though. Trust companies are becoming opaque with their reporting to hide the truth as I noted in Beijing Rongdian and the ¥1 Billion Black Hole; Banks Hide Information on Trusts and WMPs.

The latest trust numbers come from late February, which I posted here: Trust, WMP Activity Weak In February. Preliminary trust data was even worse for the first week of March, but that is the last data available.

Bloomberg finally picked up coverage of the topic, from the angle of real estate trusts:

Property Trust Sales Drop 49% as Vicious Loop Seen: China Credit
“The banking system and the shadow banking system are becoming concerned about exposure,” David Cui, China strategist at Bank of America said in an interview yesterday. “Once people refuse to provide credit to developers, their balance sheets will be under pressure, forcing them to cut prices. Once enough of them cut prices, fewer people would buy because most people buy property only when they think the price is going up. If this persists, it will turn into a vicious loop.”

That was actually the headline of a post from one month ago: China Trusts Still Struggling To Raise Capital; Real Estate Liquidation Possibly Caused By Trusts In Trouble, Not Developers. It is the trust market, the credit market, that is driving the real estate market. This was true on the way up and it is true on the way down. In some cases, the decline is caused by investors unwilling to lend to developers, in at least one case, it may come from trust companies calling in loans. As I noted in Chinese Corporate Investors in the Dark as Trust Investments Falter; Borrow Short to Lend Long Strategy Falling Apart in 2014, a lot of firms used the borrow-short lend-long strategy to finance operations. Even trusts have used this system, with some firms offering trust products with no explanation of where the money goes. The money is actually used to finance other trust investments at longer maturities that are currently unattractive to investors who want shorter maturities. Rather than list all the posts on the topic, you can use the 信托 or banks tag. In the posts covering WMP data, you can clearly see investors moving into guaranteed products, with shorter maturities, issued by larger banks.

Back to Bloomberg:
New property trust offerings accounted for 30 percent of total trust sales in the first quarter, down from 33 percent in the last three months last year, according to data compiled by Use Trust. Figures from the research firm are for collective products only, which are sold to more than one investor.
If real estate trusts are down 49% and their share of the trust market is only down 3 percentage points from 2013.......the rest of the trust market has also collapsed. The real estate market is the epicenter, but this is the bursting of the shadow banking market, quite likely the end of the credit bubble, and I have yet to see any English media coverage.

ZeroHedge posted this recently in Tapering Is Tightening. Taper is indeed tightening because the Fed is going from extra loose monetary policy to a normal loose monetary policy.

If the taper can have this effect on the market, how about an even bigger slowdown in credit growth? The last time we saw a slowdown as large as the one underway in China was back in 2008.

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