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source from：wsj
MARKETS MARKETS MAIN
Chinese Companies Move Deeper Into Shadow Banking
Beijing’s game of Whac-A-Mole against financial risks is sending some borrowers into darker corners
By Chao Deng and Lingling Wei
Updated June 4, 2017 10:25 a.m. ET
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BEIJING—China’s crackdown on debt is driving some companies to a murkier form of financing as it gets harder to secure bank loans or tap the bond market.
New loans from so-called trusts, firms that raise money from individuals and corporations to plow into riskier areas of the economy, reached 882.3 billion yuan ($129.5 billion) in the first four months of this year, according to data from the People’s Bank of China, nearly five times as much as the same period in 2016.
Trust firms, which often charge borrowers higher rates than banks, occupy a middle ground between banking and asset management. They are licensed and loosely regulated by China’s banking watchdog, but they lack some of banks’ protections, such as government deposit insurance, and they have more flexibility to invest in risky areas than banks do.
For companies, trusts represent the next best thing as bank loans or bond financing dry up or become more expensive.
Government-owned Qingzhou City Construction & Investment Co., in the eastern city of Qingzhou, received permission to issue bonds last year. But with yields rising on corporate debt, it has turned to a trust firm instead, according to people familiar with the matter.
Daye Trust Co. is helping Qingzhou City Construction raise 200 million yuan through a two-year product that offers investors returns of 6.5% a year. The firm would pay Daye a rate of about 8%, which is still less than it was expecting to pay for bonds, these people say. Qingzhou City Construction intends to use the proceeds to finance a water-treatment project.
One area of concern for authorities as they tackle soaring Chinese debt—a factor in Moody’s Investors Service’s downgrade of China’s sovereign debt last month—is loans that banks disguise as investments. A shift to trust lending would make it even harder to gauge the true extent of credit in the system.
“Regulation of the trust sector has been much more ad hoc” compared with that of the formal banking sector, says George Xu, a Moody’s credit analyst. As a result, “trust firms can hide where they’re investing.”
China’s banking regulator declined to comment on the rise in trust loans.
Actions by China’s central bank and banking regulator to raise short-term funding costs and rein in banks’ hidden loans have made banks increasingly reluctant to lend.
China Zheshang Bank Co. 2016 1.20% , a midsize lender that had grown with the help of off-book loans and aggressive lending tactics, said that it would step up scrutiny of borrowers, turning down property developers in cities with unsold housing and businesses in “outdated industries.”
The regulatory storm has roiled Chinese markets, sending bond yields to the highest levels in two years, as banks sell down their bondholdings to boost liquidity. Yields rise as bond prices fall. Higher yields are a burden for companies, many of which have canceled bond-issuance plans.
The market stress has made Beijing wary that it is moving too fast. According to people familiar with the matter, the central bank and the banking, securities and insurance watchdogs have held meetings in recent days to discuss how to tackle the debt problem at a more measured pace.
Authorities continue to give trusts more leeway than banks to invest in risky projects, including property, steel and other sectors, where authorities have tried to dial back borrowing.
Shanxi Trust Co. in northern China said it issued the sixth iteration of a trust product for a local construction company in April, with the aim of raising 50 million yuan. The borrower had been working with the trust firm for the past few years, according to Liang Lu, a project manager at Shanxi Trust, who said its customers don’t typically include companies that can get bank loans.
Trust loans have surged at times in the past, amid regulator tolerance and high demand for credit from companies when the economy was booming. A record surge in the first four months of 2013 led regulators to crack down on the sector. Two years later, trusts helped investors leverage bets to buy stocks, which contributed to a flood of borrowing that culminated in a market crash that summer.
At the end of 2016, trust loans made up 10% of China’s total so-called shadow-banking system, or lending outside regular bank loans and bond markets, according to Moody’s. Trust loans accounted for 15% of total shadow banking as of the end of 2013. Moody’s says the decline in share was mainly because high-yielding investment products from banks, another kind of shadow lending, grew faster.
‘For companies, trusts represent the next best thing as bank loans or bond financing dry up or become more expensive.’
Even companies with access to formal banking channels and the capital markets are turning to shadow lending.
“It takes time to issue bonds,” said Eva Lau, investor-relations manager at Shimao Property Holdings Ltd. , one of China’s largest property developers. The Hong Kong-listed firm got central-bank approval to issue notes in the interbank market, but in anticipation of a lengthy process, it turned to Xiamen Trust Co., which is helping Shimao Property 0813 1.80% raise 1 billion yuan.
The company still plans to issue bonds and expects to pay yields of up to 4.5% on the later bond sale, said Ms. Lau. By comparison, borrowing from nonbank financial institutions, including trusts, came at 5.7% interest rates in 2016, compared with 5.3% from banks issuing yuan loans, according to Shimao’s latest 2016 financial report.
Ms. Lau said Shimao turned to Xiamen to diversify funding channels and said that the recent regulatory tightening wasn’t a factor. The company doesn’t detail its funding sources; Ms. Lau said trust financing is a tiny portion of the firm’s total financing.
Back in Qingzhou, one person familiar with Qingzhou City Construction & Investment said the company’s strong government backing means it doesn’t have to pay as much as a private company for trust financing.
The firm has yet to tap the bond market.
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