In China, trust firms shift, rather than reduce, shadow banking riskSunday, 15 Mar 2015 | 7:30 PM ET Reuters 4 SHARES COMMENTS Start the Discussion Getty Images China's trust firms, with total assets of $2.2 trillion, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans - blunting regulators' efforts to reduce shadow banking risk. By redirecting money into capital markets and OTC products like asset-backed securities (ABS) and bankers' acceptances, trusts are acting less like lenders and more like hedge funds or lightly regulated mutual funds. And the shift - a response to a clampdown last year on trust lending to risky real estate and industrial projects - means a significant chunk of shadow banking risk is migrating rather than shrinking. China trusts take in funds from retail and institutional investors and re-lend or reinvest that money, often in parts of the economy that struggle to obtain bank credit, like mid-sized private enterprises or municipal industrial projects. As of end-2014, total trust assets were 14 trillion yuan, according to China Trust Association data. Previously, people who bought into opaque wealth management products, many of which were peddled by banks but actually backed by trust assets, found themselves heavily exposed to real estate loans. Trust firms' changing asset mix means these investors may now instead find themselves exposed to high-yield corporate debt (junk bonds), volatile stock funds or risky short-term OTC debt instruments. While this could help keep the wealth management industry running, and by extension help the trust industry stay afloat, it could delay efforts to properly price risk. Read More A shadow banking sector has gotten 65 times larger A Reuters analysis of China Trust Association data shows that while loans outstanding grew just 8 percent last year - far below the 62 percent growth in 2013 – growth in obscure asset categories including "tradable financial assets" and "saleable fixed-term investments" was 77 percent and 47 percent, respectively. Funding stress Sources at two major trust firms, who asked not to be named due to the issue's sensitivity, confirmed they were shifting investment into the capital markets and OTC instruments. An individual at one of China's top three trusts said that in the past year his firm's investment in shares and bonds grew 30-40 percent and 50 percent, respectively - helping explain where some of the leverage that has driven recent Chinese stock and fixed income market rallies has come from, and raising questions over how sustainable those rallies may be. He said his trust had begun investing in ABS and bankers' acceptances - tradable claims on a company's future revenues - in January and October 2014, respectively, and would invest more this year. Issuance of bankers' acceptances, the riskiest form of shadow finance, slowed for most of last year only to rebound late in the year, while ABS issuance has risen rapidly over the past year as China's formal credit markets tightened. Chinese companies often use bankers' acceptances as a substitute for cash, so an increase in issuances can suggest businesses are under funding stress. Net issuance of bankers' acceptances surged from the fourth quarter of last year, and in January hit the highest level since the first quarter of last year, eclipsing trust loans and company-to-company "entrusted" loans as the largest net source of shadow finance. This could imply that regulators' efforts to squeeze the shadow finance sector have been only partially successful. A spokesperson for the China Banking Regulatory Commission declined to comment when reached by telephone. Reinvention While overall shadow finance growth slowed to 43 percent last year, according to People's Bank of China data, this 'leakage' from one kind of shadow financing to another reduces the impact of the regulatory crackdown on the sector. Trust lending was by far the fastest growing form of finance in China from 2004-2014. Loans from trust firms expanded by over 26 times from end-2005 to an estimated 5.5 trillion yuan ($878 billion) outstanding by end-2014. Total outstanding debt in the Chinese financial system during that period merely quadrupled. During that period, trusts were a vital financing channel for local governments restricted from borrowing in formal debt markets. But the explosive growth of outstanding trust loans worried Beijing and prompted last year's crackdown. Trusts have since struggled to reinvent themselves as something closer to traditional asset managers or private funds. by Taboola MORE FROM CNBC How a trader made over $1 million in two days Why Google's Schmidt says 'Internet will disappear' Cramer's Tesla warning: Musk is a total disaster Buffett: These investments are a 'fool's game' Cramer: How to play Apple and make a fortune Cramer Remix: Make a fortune on these 4 stocks
Debates are raging about whether big data still holds the promise that was expected or whether it was just a big bust. The failure of the much-hyped Google Flu Trends to accurately predict peak flu levels since August 2011 has heightened the concerns. In my mind, there is no doubt that data analytics will one day help to improve health care and crime detection, design better products, and improve traffic patterns and agricultural yields. My concern is about how we will one day use all the data we are gathering—and the skeletons it will uncover. Think about how DNA technology is being used to free people who were wrongfully imprisoned decades ago. Imagine what supercomputers of the future will be able to do with the data that present-day data gatherers haven’t yet learned to use. Over the centuries, we gathered data on things such as climate, demographics, and business and government transactions. Our farmers kept track of the weather so that they would know when to grow their crops; we had land records so that we could own property; and we developed phone books so that we could find people. About 15 years ago we started creating Web pages on the Internet. Interested parties started collecting data about what news we read, where we shopped, what sites we surfed, what music we listened to, what movies we watched, and where we traveled to. With the advent of LinkedIn, MySpace, Facebook, Twitter and many other social-media tools, we began to volunteer private information about our work history and social and business contacts and what we like—our food, entertainment, even our sexual preferences and spiritual values. Today, data are accumulating at exponentially increasing rates. There are more than 100 hours of video uploaded to YouTube every minute, and even more video is being collected worldwide through the surveillance cameras that you see everywhere. Mobile-phone apps are keeping track of our every movement: everywhere we go; how fast we move; what time we wake. Soon, devices that we wear or that are built into our smartphones will monitor our body’s functioning; our sequenced DNA will reveal the software recipe for our physical body. The NSA has been mining our phone metadata and occasionally listening in; marketers are correlating information about our gender, age, education, location, and socioeconomic status and using this to sell more to us; and politicians are fine-tuning their campaigns.
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