Slower Growth and Andy Xie on Bailouts

Who Should Pay for Trusts that Go Bust?
While there are numerous trust companies, this industry could not have taken off without big banks entering the picture. In a few short years, the trust industry has risen from nothing to 10 trillion yuan in assets. The distribution power of big banks made this possible.

The banks became involved to increase income from fees. As their lending capacity became constrained by capital and sometimes government directive, they embraced trust products as the main off-balance-sheet vehicle to increase lending to their high-risk clients. These clients are usually willing to pay high fees. The banks could charge 4 to 8 percent commission on such products. When the products mature in, say, three years, they need to be rolled over. The banks could get 4 to 8 percent again.

Some trust companies are big and have distribution power. Most, I believe, are vehicles at the service of big banks. They charge a commission, too, though it is much smaller than the banks.

The adverse selection problem begins with who is willing to pay such high fees and high interest rates at the same time. Let's say the interest rate is 10 percent. The product is for three years. The commissions for banks and trust companies total 10 percent. The borrower gets 90 percent of the loan amount for a 30 percent interest payment over three years. Few businesses in China earn such a high return. The trust loan borrowers, mainly mining companies and property developers, often have greenfield projects. Their future depends greatly on the macro environment. The borrowers essentially gamble with other people's money.
As I wrote previously, the real story isn't some huge collapse, rather it is an issue of a trend shift. It only takes a small change to tip tje balance at when there are large imbalances and businesses are operating on very thin margins. Therefore things may seem to blow over, but in reality a major change is underway. Conversely, I've been expecting this shift for going on three years......but the global environment is worse today than it was in 2011 when Chinese real estate looked like it would crack.

Speaking of changing trends: Many Local Gov'ts Aim for Lower GDP Growth This Year
Last year officials in 24 places aimed for double-digit expansion, but only 14 have set such lofty targets for 2014

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