Banking Crisis
China's Property, Trust Woes Need "Decisive" Action – Bank Of Singapore
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).