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.
(Bloomberg) — 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.”
Zhongzhi Enterprise’s payment woes aggravated already fragile investor mood toward Chinese markets, where stocks and the yuan extended slides Monday on concerns about imminent default by a former top developer and plunging credit demand across the economy. Signs of heightened stress at a major player also are rekindling anxiety about a trust industry that has faced years of turbulence following regulatory crackdowns.
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Risks are also on the rise for banks as they could be asked to offer support for some housing projects amid the industry’s cash crunch, JPMorgan analysts wrote.
“The probability of banks bailing out trust investors is low, in our view. But if funding support from trusts on work-in-progress housing projects recedes, banks may be asked to fill the funding gap,” the analysts wrote. “We consider this another form of national service risk for banks.”
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