Banking Crisis

China's Property, Trust Woes Need "Decisive" Action – Bank Of Singapore

Tom Burroughes Group Editor 22 August 2023

China's Property, Trust Woes Need

Missed payments from Zhongrong International Trust and Country Garden – a provider of financial products and a real estate developer, respectively – are serious developments in a country already wrestling with slowing growth and cooling relations with the West.

Missed payments at a major Chinese real estate group and a large trust company have jolted markets. Investors fear that the world’s second-largest economy, already weighed by slowing growth and the aftermath of harsh anti-pandemic measures, could implode. Reports said authorities have encouraged fund houses to buy their own equity-focused products.

Bank of Singapore yesterday said that the plight of Zhongrong International Trust – which has missed a set of payments – and Country Garden, the developer, were reasons for caution rather than panic. The Singapore-headquartered private bank said Beijing must act “decisively to avoid contagion risk.”

Attention has been increasingly focused on the amount of leverage in China’s financial and real estate system – both closely related – in recent years. In late 2021, Evergrande, a large Chinese developer, was declared to be in default

Amid years of hectic growth, there have been regular warnings about cracks in the Chinese financial system, such as the market for so-called wealth management products. Also, when China’s President Xi launched a crackdown on sectors such as private sector schooling, video gaming and IT, it alarmed international investors fearful that economic growth was being sidelined for political reasons. Tensions between China and the West over trade policy, alleged Chinese theft of intellectual property in the West, clashes with India, and China’s oft-stated claims to Taiwan, have also added to nerves.

Worries that China might have its own version of Japan’s property market slump of the late 1980s, or the US sub-prime mortgage debacle of 2008, have hit markets. Hong Kong’s Hang Seng Index has fallen 12.5 per cent since the start of January. By contrast, the US S&P 500 index has risen 14.7 per cent. In the past few days, market falls have reflected concerns about China.

As reported by Bloomberg and other media on Monday, China’s largest mutual fund houses promised to buy their own equity-focused products, heeding calls from authorities to bolster the market as a selloff continues. At least 14 firms pledged to invest in their funds as of mid-Monday, taking the total tally to RMB870 million ($119 million).

Trusts and funds
Zhongrong International Trust, which had the equivalent of $108 billion in assets under management at the end of 2022 (source: Wall Street Journal, 8 August) caused alarms when four trust products managed by the firm missed interest and principal payments totalling the equivalent of $14 million to three publicly listed Chinese companies. (The WSJ cited stock-exchange filings.) 

Meanwhile, Country Garden, which is more than three decades’ old, has reportedly missed interest payments on two US dollar bonds.

There are fears that if Zonghzhi’s woes expand and more defaults take place, it could undermine other investment products sold to wealthy individuals and firms in China. 

The WSJ had reported that Zhongzhi hasn’t responded to a request for comment. The report noted that China’s trust industry had a total of $2.9 trillion in assets under management as of 31 March.

With trust funds a source of financing for property development – and hence a large driver of Chinese GDP – the episodes coincide with a period when in much of the developed world, interest rates have risen from ultra-low levels. 

Not all investors think China’s prospects are grim. A few days ago, Matthews Asia, the San Francisco-headquartered firm, said fears about the country’s economy are overstated.

A side-effect of a more sluggish, or even contracting, Chinese economy is that it will reduce the growth rate in the number of high net worth and ultra-HNW individuals in the country. Over recent years, Western and local Asian banks have sought to tap into the perceived major wealth opportunities in the country. China also launched its cross-border Wealth Management Connect scheme in September 2021, seeking to foster tighter financial bonds with Hong Kong. 

As China and other Asia countries were hit by lockdowns to curb the pandemic, HNW wealth fell by 2.7 per cent in Asia-Pacific from 2021 to 2022 (source: CapGemini World Wealth Report 2023).

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