Default risks worry China's trust sector

The failure of a major trust program to repay investors at maturity on Wednesday has alerted the sector to default risks after years of feverish "gold rush." Jilin Province Trust, which raised 972.7 million yuan (159.5 million U.S. dollars) to invest in Shanxi Liansheng Group, informed its clients that it had no repayment tietable as the debtor itself is mired in debt. Shanxi Liansheng Group, one of the biggest private miners in coal-rich Shanxi Province, owes over five billion yuan to six trust companies. In January, another major trustee, China Credit Trust, just managed to repay three billion yuan of principals invested in another Shanxi-based coal miner. But the interest is yet to be paid. The two trust firms are not alone. Dozens of repayment crises were made public by media reports in 2013. Many of them were related to investments in the coal industry. The lucrative coal and construction sectors are most appealing to China's trust funds. But the Chinese government's string of cooling measures have curbed investment in construction. Meanwhile, ownership of mines is much more complicated than that of land, and is therefore prone to legal conflict. The assessment of mines is also uncertain, given that mine deposits are usually indeterminate. China Orient Asset Management Corporation said in a recent report that trust companies' investment in the coal sector is the most vulnerable to risks as an economic slowdown has slashed coal prices, which were once soaring. Nearly 16 billion yuan of collective trust programs investing in mineral resources will come to maturity in 2014, according to data released by the China International Capital Corporation. "Our target this year is to secure repayment, instead of boosting capital scales like before," a senior trust manager told Xinhua on condition of anonymity, adding that the trustee had intensified inspections of projects it invests in. The China Trustee Association estimates that total assets in the trust sector topped 10 trillion yuan in 2013, surging from less than one trillion yuan in 2007. The rapid growth was fuelled partly by "forced repayment of principal and interests at maturity" usually promised by trust firms, who created a dreamy investment world of high returns and no risk. Actually, so-called forced repayment is just an industry norm, rather than actually being obliged. Trust returns are not guaranteed by law since the sector is highly venturesome. The recent repayment struggles have calmed many investors. Trust programs solicited a collective total of 60.93 billion yuan in January, diving 10.23 percent year on year, according to specialist web portal www.use-trust.com. Banks, which used to serve as one of the major channels to raise trust funds, are getting cautious and some have reportedly cut the business. One bank analyst told Xinhua that banks, increasingly worried about increased bad debt ratios, will inevitably bear the brunt of trust programs' default crises. DEFAULT RISKS UNDER CONTROL? Although many trustees are confronted with repayment pressures, business insiders still believe the trust sector is generally healthy and have ruled out systemic risks. "The default crises in the news were individual incidents, and don't indicate a general trend in the sector," said Zhou Xiaoming of the China Trustee Association. As of the end of 2013, net assets in the sector stood at 255.5 billion yuan, enough to cover potential repayment risks, according to Zhou. China's financial authorities are also taking measures to contain risks. In 2010, the China Banking Regulatory Commission stipulated that a trust company's net capital should be no less than 40 percent of its net assets, in order to ensure quick repayment during a default crisis. The commission reiterated in a January tone-setting conference that it will restrict trust firms in terms of their net capital-to-net assets ratio and urge them to release information about their investment programs in a timely manner.