JPMorgan Sees 'Vicious Cycle' as Top China Trust Misses Payment
Comment of the Day

August 14 2023

Commentary by Eoin Treacy

JPMorgan Sees 'Vicious Cycle' as Top China Trust Misses Payment

This article from Bloomberg may be of interest. Here is a section:

Missed payments on multiple high-yield investment products by a major Chinese shadow lender may trigger a “vicious cycle” for property developers’ financing and more delinquencies for trust products, JPMorgan Chase & Co. warns.

Liquidity stress is intensifying for indebted developers and their non-bank creditors after a unit of Zhongzhi Enterprise Group Co., one of China’s largest private wealth managers, failed to deliver on-time payments for multiple products, the US bank’s analysts including Katherine Lei wrote in a report Monday.  

About 2.8 trillion yuan ($386 billion), or 13% of China’s total trust assets, may see rising default risks, given their exposure to the property industry and local government debt, the report says. Up to 80% of local government financing vehicles may not be able to repay their debt principals, JPMorgan estimated.

“The trust defaults may set off a vicious cycle on POE (privately-owned enterprise) developers’ onshore debt,” the analysts wrote. “This follows that rising concern of developer defaults weakens investment sentiment and, as a result, trust companies may not be able or willing to roll over existing real estate-related products.”

Eoin Treacy's view

When Chinese investors talk about trusts, they are a totally different product to what most global investors are accustomed to in their home markets. Trusts in China ballooned in popularity about a decade ago. They were set up as a way for wealthy private individuals to get guaranteed and outsized returns from investing in property. The sales pitch highlighted how the government never allowed defaults, so investment was risk free. Just how inaccurate that statement is has been highlighted on several occasions over the last several years.

The simple fact is China’s property developers have an insatiable appetite for capital. When access to local debt markets was cut off, they resorted to trust products. When that was closed down, they issued US dollar bonds. Now that has been shut down, they are dependent on the government for funding and it is not clear the government is in a mood to cooperate.
The China High Yield Total Return Index continues to trend lower. This article from 2021 contains some additional numbers on the size of the market. 
China’s government bond yields continue to compress which suggests both a flight to quality and deflationary fears. The wider question is whether this will have global implications. China holds a dominant position in global commodity demand. If infrastructure/property investment is no longer a national priority that is a major headwind for industrial resources.

The LME Metals Index remains under pressure and a move below 3500 would reassert the medium-term downtrend. 

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