China orders $4 trillion audit of shadow banking sector amid mortgage crisis

BEIJING (BLOOMBERG) – China’s top auditor is carrying out a review of the US$3 trillion (S$4 trillion) fiduciary sector, paving the way for a potential overhaul of a key shadow banking sector where losses on home loans are increasing.

In an unanticipated move, the National Audit Office – which previously conducted a review of banking exposures to Mr Jack Ma’s Ant Group – over the past month inspected the books of at least 20 trust companies, including the five main ones, to assess the risks. they are posing for financial stability, according to people familiar with the matter.

Firms are being asked to report on their subprime loans to developers and any plans to get rid of them, the sources said. The audit office is expected to submit its findings to policymakers in Beijing, who could decide on future sector reforms, the sources added.

While it’s unclear what regulatory action the review will spur, the move illustrates how concerned authorities are about contagion from the real estate sector destabilizing the financial sector. Trust companies have this year defaulted on around 58 billion yuan (S$11.8 billion) of investment products linked to property developers, which were sold to wealthy Chinese people, according to data tracker the Use Trust industry.

These investors have joined homebuyers and bond fund managers in feeling the pain of a liquidity crunch that has led to dozens of development defaults and frozen the construction of hundreds of projects across the country.

China’s trust industry combines features of commercial and investment banking, private equity and wealth management. Companies pool household savings to offer loans and invest in real estate, stocks, bonds, commodities and even bottles of sorghum liquor. No other company in the financial sector operates in all of these asset classes.

Trusts were once a popular source of financing for the real estate industry. Until recently, fiat products were viewed by wealthy Chinese individuals and institutions as a safe place to park their money.

The inspection by the audit office is still ongoing and no conclusion has been reached so far, the sources said.

China’s National Audit Office is responsible for inspecting the execution of the central government’s budget and reports its findings to Premier Li Keqiang. The agency is also called upon to carry out ad hoc reviews of public institutions, which pose a threat to broader economic stability. Its inspection of more than a quarter of the trust industry shows the government is seeking an independent assessment of the risks involved, the people said.

In recent years, authorities have taken a series of measures, including stricter capital requirements, to cool what had been the fastest growing segment of the shadow banking sector.

The country’s 68 trust companies held a total of 20.2 trillion yuan in assets at the end of March, down 5.5% over the past two years, according to the China Trustee Association. About three-quarters of that was in money trusts, of which sponsor trusts accounted for about 11%.

The inspection comes as trust companies have more recently emerged as unlikely white knights for the struggling property sector by becoming mini-developers themselves.

Trust companies including MinMetals Trust and Zhongrong Trust have taken stakes in at least 10 real estate projects this year, betting the unfinished homes will eventually bring in cash to pay off some of the $230 billion in backed funds. the property they issued to investors. .

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