Over the past 5 years, banks in China have been repackaging their loans and selling them to trust companies who would then sell them on as a wealth management product offering juicy returns, sometimes as much as 40%. This rise of this "shadow banking" system has worried analysts as the banking sector has extended around $15trn credit since 2009. This year, Industrial and Commercial Bank of China (ICBC) refused to safeguard a $300m trust which it had sold to its customers. In the end, default was averted but alarm bells are ringing about a possible Chinese Bear Stearns moment.
Consider this conversation between a foreign investor and a Chinese credit analyst whose company analyses trust products:
Q: How do you analyse the credit risk of the local governments who've bought a third of the trust products?
A: We don't.
Q: Why not?
A: If they were to fail, it would mean the central government had failed. Beijing cannot fail.
Q: What do you think of the credit risk of the property related trusts?
A: The credit risk of those exposed to the 3-5 tier cities looks very poor.
Q: So have you rated them as poor?
Q: Why not?
A: If those property markets were to fail, the local governments there would fail. If those local; governments fail, Beijing fails. Beijing cannot fail. QED the property market cannot fail.
Q: Where would you put your own money?
A: In Canada.