FT Goes into the Shadows

Here are a few snips from a long FT story on shadow banking. This story is a microcosm of everything we've been seeing this year: tight credit conditions, shrinking trust market, excess supply in the real estate market and local governments reliant on land sales for public finance as well as for loan collateral.

Into the shadows: risky business, global threat

As chief accountant for Yuncheng City Investment, a financing vehicle for the local government, Mr Qiao has played a crucial role in the development of this gritty steelmaking city in central China. His latest job is to sell his company’s “trust product” – a high-interest, deposit-like investment – with the proceeds going to a big public heating project for Yuncheng.

Despite paying a tempting 9.7 per cent annual interest rate, his product, marketed as “Eternal Trust Number 37”, is not catching on with investors. Mr Qiao is worried.

The problem could be that Yuncheng’s property market has hit a rough patch or that a local steel plant has closed. But he blames events outside Yuncheng for his predicament. The near-default of other Chinese financial products recently has set off alarms – inside China and in global markets – that the country is in the midst of a dangerous credit bubble.

Mr Qiao admits the Yuncheng heating project will not provide any re­turns for his company, a­n un­settling fact for any investor. But he is dismissive that this is the problem.

“All of our investments are public works that should actually be paid for by the local government so when the trust product matures the government should take this project off our hands and give us the money to repay investors,” he says. “Don’t worry, it is impossible for there to be any sort of financial crisis here in Yuncheng.”

Could falling land sales be a problem though?

Yuncheng City Investment is one of more than 10,000 “local government financing vehicles” (LGFVs) set up by Communist party officials as a way to circumvent laws that forbid local governments from running deficits.

Their job is to raise money any way they can and spend it on behalf of local authorities, often on public works projects such as roads, public heating or sewage systems.

......The two-year trust product Mr Qiao is trying to sell – he had planned to raise Rmb350m by the end of March – was collateralised by a piece of land near the Yuncheng airport.

The fortunes of the property developments he can see out his window are of great importance to Mr Qiao since government land sales to commercial real estate developers provided almost two-thirds of Yuncheng’s Rmb22.4bn in fiscal revenue in 2012.