The Noose Tightens: CBRC Investigates Trust Loans to Real Estate

Back in 2014: China Tightens Oversight of Trusts as Default Risk Rises
China’s banking regulator ordered owners of the nation’s 68 trust companies to be prepared to provide funding or sell their stakes as the risk of defaults rises in the $1.9 trillion industry for high-yield investment.

The China Banking Regulatory Commission told trust companies to either restrict their businesses and reduce net assets or have shareholders replenish capital when the firms suffer losses, according to an April 8 notice that was seen by Bloomberg News. The regulator will also impose a “strict” approval process on trust firms’ entry into new businesses and products starting this year, according to the document.
After a brief crackdown, the trust business was up and running again.

Bloomberg, April 2017: China Said to Crack Down on Property Financing Through Trusts
The China Banking Regulatory Commission’s guidance covered real estate and other industries facing overcapacity, according to people familiar with the matter. The CBRC will take action against disguised property financing by the 20 trillion yuan ($2.9 trillion) trust industry, including lending through partnerships, asset management plans or related businesses such as suppliers, the people said.
This crackdown is now underway after it revived in the first quarter.

iFeng: 房地产又一通道被收紧 银监会检查信托违规拿地
China Securities Journal reporter was informed that the recent CBRC to the banking regulatory authorities issued "2017 trust company on-site inspection points."


Whether through the combination of equity and debt, partnership business investment, the proceeds of receivables and other modes of disguise to the real estate development enterprise financing to circumvent regulatory requirements, or to assist other institutions to carry out real estate trust business.


Whether there is a real equity or creditor's rights in the project of "stock + debt", whether there is a situation where the real estate enterprise acts as a beneficiary of the shareholders' borrowing, whether or not it is disqualified in the name of the shareholder's loan.

...Industry sources said that as other financing channels are limited, the trust company to become an important channel for real estate developers to finance. But this document issued after the trust company to carry out the current financing business is facing tightening. This means that real estate financing and an important channel is being tightened.
Caijing: 房企融资四面楚歌 信托渠道突然收紧房企命脉告急
This means that after overseas bonds were halted, developers through the trust company financing this important channel also suffered tightening.

Wall Street on Monday mentioned that trust financing is the main financing of housing loans in addition to bank loans, with the main financing channels have been limited real estate, real estate trust business quietly warming.

"Economic Reference" quoted data pointed out that this year, 68 trust companies issued a total of 326 real estate trust products, the cumulative financing for housing enterprises 100.55 billion yuan; May real estate trust issue is still "increasing." Up to now, May housing prices through the issuance of collective trust fundraising project has reached 11.37 billion yuan. May 13 to May 19 of the week, a total of 24 trust companies issued 39 sets of trust products, the number of shares increased by 11, an increase of 39.29%. Among them, 10 for the real estate projects.

...Wall Street.cn mentioned at the beginning of the month, since the beginning of the year, Vanke and R & F and other housing prices have canceled the debt, involving the amount of at least 50 billion yuan. The two companies in the cancellation of the announcement said that in view of the recent changes in the market, decided to cancel the issuance of medium-term notes, Vanke more twice to cancel the issue of medium-term notes.

In fact, the plight of developers emerged in the fourth quarter of last year. Hai Tong Securities analyst Jiang Chao, Zhou Xia and Zhu Yixing in the report pointed out that the quarterly real estate bond issuance and net financing was only 30% of the third quarter, mainly due to the tightening of corporate bonds. From November last year to the end of February this year, real estate corporate bonds issued only 29.
Tightening of credit revived the trust sector loans to real estate, hence the crackdown.

DW: How dangerous are China's shadow banks?
"There are indications that regulatory measures to curb system-wide leverage show unintended consequences; specifically, in reviving 'core' shadow banking activities that had previously been constrained by regulation," said George Xu, Associate Analyst at Moody's Investors Service.

Moody's said borrowers in sectors such as property, local government financing vehicles and industries struggling with overcapacity faced reduced access to traditional bank loans and were being driven to trust loans.
We've seen this all play out before, in 2013 and 2014. Right after the Taper Tantrum in the U.S. came China' cash crunch. From June of 2013 through all of 2014, there was an attempted deleveraging. The result was falling home prices, panic, and the final massive monetary emission in early 2016. Now we're back to seeing a crackdown, complete with signs of periodic cash crunches such as in March. What's different from 2013 is the scale of the problem and the severity of the crackdown. The commodity, real estate and currency market declines from 2014-2016 will be dwarfed by what follows.

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