Salient to Investors:

Lian Ping at Bank of Communications said potential defaults of property trusts must be stopped from spreading nationwide – trusts have become too large to fail.

Trusts target people with at least 1 million yuan to invest and are the fastest-growing segment of China’s shadow banking. Tao Wang at UBS,said trusts comprise over a quarter of China’s non-bank lending or about 45 percent of GDP.

Shadow banking flourishes because more than 90 percent of China’s 42 million small companies can’t get bank loans.

China’s 64 trust firms pool household savings to offer loans and invest in real estate, stocks, bonds, commodities.

KPMG said trusts will overtake insurance by year-end as China’s second-largest financial business after banks.

China International Capital said as much as 15 percent of China’s 560 billion yuan of property-linked trusts that come due by the end of 2013 may default. Issuers may be forced to extend payment deadlines, sell new trusts to pay off old ones or dispose of collateralized assets.

Ivan Shi at Z-Ben Advisors said the heyday of trusts is gone, and surviving the peak of repayment next year is the biggest challenge as many projects are dodgy. Shi said trust popularity reflects the growing high-net-worth-individual market and demand for diversified financial services, especially with implicit guarantees on repayment – what made the trusts prosper in the past few years is now threatening to bring them down.

The IMF said risks may be artificially suppressed by rolling over debts into new products or buyouts by stakeholders.

Over 35 percent of trust assets in China were funding infrastructure and real estate construction as of Sept. 30, property-linked trusts accounted for 11 percent of assets.

Boston Consulting said China ranked third globally in millionaire households in 2011, behind the US and Japan. Julius Baer estimates the number of millionaires may double by 2015 to at least 2.8 million.

Ping An Insurance said trust buyers are mostly small-business owners and senior corporate managers, with half of them controlling at least 10 million yuan of assets. Almost 77 percent of trust investors bought real estate-linked products, and 75 percent said they achieved annual returns of over 9 percent.

Fan Jie at Benefit Wealth said the uniqueness and competitive edge of trusts as an all-inclusive asset manager will be undermined going forward as every other type of financial firm is encouraged to sharpen such skills.

Read the full article at http://www.bloomberg.com/news/2012-11-19/purple-palace-abandoned-shows-china-shadow-banking-risk.html