Rust Belt Taps Shadow Lenders; Trusts Offer BMWs to Entice Investors

Reuters: China's wary lenders force rust-belt country to take expensive shadow bank loans
In several of the hardest hit industrial provinces, including deeply troubled steel and coal producing regions, the swing back to the shadow sector – lenders outside conventional banking who usually charge much higher interest rates than traditional banks - has been stark.

Firms in Liaoning, an industrial powerhouse in China's northeast, borrowed over 2,000 percent more from shadow banks in the first quarter of this year, compared with a year earlier. The borrowing accounted for 19 percent of the province's total financing, up from just 1 percent in the first quarter of 2015.

"Economically advanced regions, especially those with strong access to municipal bond funding, don't really have to fall back on shadow financing as much," said a director at a Shanghai-based asset management firm. "Smaller and poorer areas are different."

The sharp retreat of weaker regions into shadow lending - when credit as a whole has expanded massively - suggests that traditional creditors are rapidly abandoning the long-held belief that lending to state-owned enterprises (SOEs) is risk free because local governments nearly always bail them out.
Property lending is a bigger share of bank balance sheets and now the indebted rust belt companies are tapping finance products that charge high interest. Those loans are in turn marketed to unsophisticated investors. Meanwhile, behind the scenes are our old friend, the credit guarantee and ultimately the very banks that don't want these loans on their balance sheets.
Research firm Puyi said new trust products created in the first quarter offered investors annual yields averaging 8-9 percent, highlighting the risks for struggling economies borrowing from the sector.

In Liaoning, for example, the economy shrank 1 percent on the year in the first quarter.

Perhaps aware of growing wariness about shadow bank lending, some trusts are using creative methods to get investors to part with their cash. In Tibet, where shadow bank lending rose 50 percent in 2015, trusts are offering leased BMWs as an inducement to invest in one- and three-year products.
The tails are getting fatter in China.

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