COVID-19 Expected to Roil Chinese Shadow Banking, Drive Doubling in Trust Product Defaults

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A key segment of China’s shadow banking sector will be heavily impacted in 2020 as a result of the COVID-19 pandemic.

The USD$3 trillion trust industry in China is on track to see defaults double this year as a result of the spread of the coronavirus, according to a report from Pension & Investments.

Xu Zijun, senior analyst at Reality Finance Research in Beijing, said that around 300 trust products will default in 2020, as compared to a record-breaking 118 last year.

Around 5.4 trillion yuan ($766 billion) in trust products are scheduled to mature in 2020.

The products are considered to be part of China’s shadow banking system, providing high-yield instruments underpinned by loans to banks, institutional investors and high net-worth individuals.

China’s trust sector was already in a vulnerable state prior to the COVID-19 pandemic, with Xu pointing out the only two firms in the industry were free of defaults at the end of 2019.

68 trust companies are believed to be on the verge of collapse given that their borrowers are comprised primarily of higher risk property developers, manufacturers and local government financing vehicles.

At the end of 2019 over 1,500 trust products worth around 577 billion yuan were categorised as risky according to information from the China Trust Association, for an increase of 870 in a year-long period.

Last month Anxin Trust Co., announced that the Chinese government was assisting it in the development of a rescue plan to help avoid “systemic financial risks.”

Moody’s Investor Service said in March that asset quality in China’s trust sector is likely to continue to degrade this year and potentially create problems for other parts of the financial system, especially given that a number of Chinese banks themselves own trust companies.

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