Nov 23, 2021 07:02 PM

In Depth: Burned by Developers, China’s Trust Industry Pulls Back From Property

Long blessed with licenses that allow them to invest in a wide range of assets, Chinese trust firms poured the money they manage and channeled bank loans into property developers such as China Evergrande Group. But now with Evergrande in crisis and many other property developers also missing debt payments, these investments have come back to bite the trust industry.

Caixin learned that debt-ridden real estate giant Evergrande failed to pay interest on multiple trust products on time in September, and some trust products that had invested in the developer were in default by the end of October, including those of Citic Trust Co. Ltd., The National Trust Ltd., China Minsheng Trust Co. Ltd. and Everbright Xinglong Trust Co. Ltd.

Losing money from their property investments, some trust companies are now suffering high liquidity pressure that has in turn prompted them to scale back their immense investments in the real estate sector.

This downsizing of investment from China’s 21 trillion yuan ($3 trillion) trust industry is yet another blow to real estate, a crucial contributor to the Chinese economy. The property sector drives about 25% of GDP growth directly and indirectly, according to an estimate by Wang Tao, UBS Investment Bank’s chief China economist.

An Everbright Trust sign in Fuzhou, East China’s Fujian province, on Aug. 23. Photo: VCG

Real estate’s trusted funding source

China’s trust industry emerged in 1979 as a way to supplement the banking industry, which at the time couldn’t provide enough financing to the fledgling market economy, according to a report by Boston Consulting Group and China Foreign Economic and Trade Trust Co. Ltd.

Internationally, trust companies primarily manage trusts, trust funds, and the estates of wealthy individuals and businesses, and serve as a custodian for the owners of the assets they oversee. There are a lot of reasons to make use of trusts, such as isolating financial risks or limiting tax liability.

In China, trust companies provide investment banking services to the rich, but they also play a significant role in the murky part of the financial industry called shadow banking.

Trust companies often lend to high-risk companies that can’t get banks loans and are also used by lenders and many other financial institutions as a vehicle to invest off-balance-sheet. That’s because traditional banks and many other financial institutions are restricted from making certain investments.

To bypass these restrictions, they have often made use of trust companies, which are allowed to raise money from a variety of sources and can invest in a wide range of assets including bonds, stocks, unlisted companies and local government financing vehicles. Trust investments made on behalf of other financial institutions, which bear the investment risk themselves, are called conduit, or “channeling,” business.

As of the end of June, conduit business accounted for 43% of all trust assets under management of China’s 68 licensed trust firms, according to data from the China Trustee Association (CTA), an industry group.

China’s financial regulators have grown concerned about risks in the trust industry, in part because the conduit business enabled banks to skirt regulations and helped fuel the rapid build-up of corporate debt, particularly in the real estate industry. Industry insiders say property investments have been the biggest money-generating business for many trust firms.

Hidden exposure

It’s difficult to gauge exactly how much money trusts have invested in China’s real estate sector due to insufficient data. However, people in the industry said the two businesses are tightly interconnected.

At first glance, it appears that only a fraction of the money managed by trust firms goes into real estate. According to a breakdown by the CTA, 13% of the 16 trillion yuan in money entrusted to trust companies had been invested in real estate as of the end of June, just short of the 13.4% invested in infrastructure and well behind the 30% in industrial and commercial enterprises.

Annual reports of trust firms show that by the end of 2020, property investments accounted for more than 50% of a few trust firms’ business.


But official data only tell part of the story, trust industry insiders said. Many of the industrial and commercial enterprises that have received trust company investments are part of the supply chain for real estate.

Many conduit investments made through trust firms went to local government financing vehicles, which raise money to develop land. About 70% to 80% of conduit investments involve property, people with knowledge of the industry said.

Now, as real estate developers struggle with restricted access to financing and a plunge in sales, the trust industry is experiencing troubles of its own.

Not all trust firms invested in developers that defaulted, but out of the long list of troubled developers, it’s almost unavoidable that many trust firms have invested in at least one, a person at a trust company said.

A source who works at a trust company in eastern China said the recent real estate company defaults have done considerable damage to the trust industry. People in the industry who have tallied up trust product defaults said in the third quarter, nearly 60% of such defaults involved real estate by value.

Trust defaults in the property sector in the first 10 months of 2021 exceeded the total for all of 2020 by value, according to data from the Use Finance & Trust Research Institute. Recent debt defaults by many developers, such as luxury villa developer Tahoe Group Co. Ltd. and China Fortune Land Development Co. Ltd., included defaults on trust products.


Several trust companies that put more money into Evergrande have had to inform investors in some relevant trust products that interest payments would be delayed, said a senior manager at a small trust company, who noted that his company immediately demanded payment from Evergrande once it started showing signs of liquidity problems in the second half of 2020.

Defaults by property developers mean that trust firms need to find a way by themselves to make up for the loss. What’s more, many trust firms often choose to offer guaranteed returns to their investors in a bid to retain their reputation, although the trust regulator has said they shouldn’t do so.

Loss of trust in real estate

Trust companies are now investing less of their money in real estate, though the trend began before all the trouble with developers emerged. CTA data show that the share of property investment in outstanding trust funds, which ranged between 8% and 18% since 2010, has been on a downward trend since a recent peak of 15.38% in 2019, when the government stepped up efforts to rein in real estate financing to curb speculation.

The recent defaults are scaring off more trust firms from the real estate industry. Several people who work in the industry said that their companies have restricted new investments into the sector since the second half of 2020 and have redoubled efforts to collect the money that real estate companies owe them.

Data from China Trust Registration Co. Ltd. show that the amount of trust money newly invested in the real estate sector in September was 39 billion yuan, down 44.8% from the 12-month average.

The thinning of trust investments has created more headaches for property developers, after regulators told banks to screen developers’ qualifications before issuing loans and imposed rules such as the “three red lines” to restrict how much developers can borrow.

“Frequent debt defaults by property developers are indeed a huge point of risk for trusts,” the senior manager from a small trust company said. “Many trust firms are afraid of lending to developers even if they have unused credit lines.”

Contact reporter Zhang Yukun ( and editor Michael Bellart (

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