April 26, 2017

Still in the shadows

by Breakingviews.

China’s trust industry could use a little sunlight. The first stock market listing in 20 years is up in the air, after Shandong International Trust missed a regulatory deadline in Hong Kong. This is a pity. The initial public offering would have helped investors and regulators decipher the high-yielding trust products at the core of China’s intricate shadow-banking industry.

In October, the state-controlled company filed for a Hong Kong listing, targeting $300 million. The IPO looked set for a smooth ride after China’s securities watchdog gave the deal its blessing in February. But the application has now lapsed, indicating the mainland company failed to tick all the regulatory boxes in Hong Kong within the required six months.

Size-wise, the IPO was not a headline-grabber. But it would have provided greater clarity on the work of trust companies, which use investors’ funds to buy assets and extend loans to companies struggling to get bank credit. Peers Shaanxi International Trust and Anxin Trust have mainland listings, but Hong Kong’s higher disclosure standards – and the need for English filings – would have meant for increased information.

It would have also been timely given regulators’ current focus on trusts. Officials told trust firms earlier in April they saw “severe risks” from trust funds flowing to real estate developers and resources companies, Reuters says.

Data points to a resurgence of activity for trusts as the broader shadow-banking sector expands at breakneck pace. Growth in trust loans hit a four-year peak in January, People’s Bank of China data shows. The sector’s assets under management reached 20.2 trillion yuan ($2.9 trillion) at the end of last year, 30 percent up from a year earlier, according to industry data.

The biggest problem with China’s shadow-credit industry overall is not its size – 82 percent of GDP as of last June, according to Moody’s – or risk appetite, but its complexity. Non-bank lending is essential to channel funds to small firms and to segments inadequately served by banks. But how exactly the transmission occurs and who pays if things go wrong are often unclear.

Bringing trust companies to the market is an essential step in combating opacity. A delayed IPO looks like a missed opportunity.


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