China Trusts Still Struggling To Raise Capital; Real Estate Liquidation Possibly Caused By Trusts In Trouble, Not Developers

First the charts of newly issued trusts and newly established trusts. The data is revised each week, but there haven't been any surprises.

The first chart shows that from initial data last week, only 14 trusts were issued for ￥1.7 billion yuan. Recall that there are expected to be ￥4 trillion in trusts maturing this year, which would require a weekly fundraising of ￥75 billion to merely keep the market from contracting. Trust fundraising was way off from December numbers and down from January 2013 and there's been no improvement in February. Another domino is set up for yet another cash crunch at quarter end as we head into March.

Trusts are also playing a role in the real estate price cuts in Hangzhou. (杭州地产资金链内幕：德信地产信托承压)

It turns out that one day after slashing prices and selling out the properties, the developer in question (德信 or DoThink) terminated their trust plans 6 months early. The article notes that this is rarely seen.

Hangzhou Industrial & Commercial Trust required the firm to cut prices and move inventory in order to pay back its loans. However, both firms denied the loan was called and said it was a voluntary prepayment by 德信, moreover they did the same thing in July of last year. An industry insider quoted in the article said that more than half the time, if the trust is terminated early it is due to financial pressure.

The article goes on to discuss price cuts from developer Tianhong (teh developer whose offices were occupied by angry home buyers a week prior), noting the firm is in weaker financial condition, yet even more opaque in its finances.

Commentary

The reporter in the story wasn't able to determine who was the protagonist in the story. It sounds as though 德信 may not be in financial trouble, but it raises the question of why they'd slash prices and liquidate to repay a trust 6-months early, considering that the price cut far exceeds the interest costs they'd incur over the period.

This story raises a new twist in the credit bubble: the trust industry may be forced to call in loans due to financial pressure and that could be the pin that bursts the bubble. As the above charts show, fundraising growth is negative and only flat at its best this year. It is plausible that the pressure to sell properties quickly may be coming from the trusts and flowing to the real estate developers, rather than the other way around. It won't matter where the pin comes from if the bubble bursts, but this shows how destructive credit can be to the economy when it becomes excessive (speculative and Ponzi finance according to Minsky). It doesn't matter if there are lots of home buyers lined up for years to come, just as it didn't matter that there were plenty of home buyers in 1929. All of the discussion of urbanization and hundreds of millions of home buyers waiting in the wings is a mute point if assets are forced into liquidation today. Credit is the key.