(Bloomberg) — The analyst who predicted the turmoil that hit China’s regional banks four years ago now has a similar warning for the country’s $2.9 trillion fiat sector.
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Many of these companies are “deeply distressed, with potentially their capital solvency at risk,” said Jason Bedford, a former analyst at Bridgewater Associates and UBS Group AG.
Bedford made a name for itself by issuing early warnings about problems rocking China’s smaller banks after reviewing nearly 250 financial statements. It now does the same for Chinese trust companies, a segment of the country’s shadow banking sector that can offer returns many times those of a bank deposit.
Of the 55 trust companies that released financial statements for 2022, 14 reported non-performing and special mention assets that exceeded one-third of their total assets, according to Bedford calculations. Many of the 13 companies that have not published reports could also be in trouble, he added.
The National Financial Regulation Administration, which oversees trust companies, did not respond to a request for comment.
Cracks have already appeared in the sector which has lent extensively to struggling property developers. Missed payments by Zhongrong International Trust Co. sparked protests earlier this year, while the sector experienced its first bankruptcy in May when New China Trust Co. went bankrupt.
Trusts typically accept deposits from wealthy individual and corporate investors to invest in stocks, bonds and other assets, including loans to businesses that don’t have access to traditional banks. Trusts, which operate with fewer regulations than banks, account for nearly 10% of total loans in China, according to Bloomberg Economics.
Read more: Why crisis at Chinese trust company fuels contagion fears: QuickTake
Although Zhongrong hasn’t displayed typical stress indicators, with distressed assets accounting for just 3.7% of total assets last year, its problems appear to stem from Zhongzhi Enterprise Group Co. as a whole and its possible role in raising funding potentially renewable for other products. , Bedford said.
China opened a criminal investigation into Zhongzhi’s financial management activities this month, just days after the shadow banking giant revealed a $36.4 billion deficit on its balance sheet.
In recent years, even as rival trusts reduced risks, Zhongzhi and its subsidiaries, particularly Zhongrong, have provided financing to struggling developers and scooped up assets from companies such as China Evergrande Group.
Compared to banks which have a relatively uniform business model, trust companies are much more varied. “While some have a future, the era of high-interest loans to real estate developers, which have long been a mainstay for many trust companies, appears to be over,” Bedford said.
–With the help of Zhang Dingmin.
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