The Chinese mainland has seen a boom in trust loan lending in recent months after credit tightening measures implemented by the authorities has driven more and more property developers into this novel credit channel.

New trust loans approved for developers-credit extended through trust companies jumped 73 percent year-on-year to over 200 billion yuan in the first half of 2011, according to data from the China Trustee Association.

And the second quarter saw a more staggering 92 percent increase to about 136.7 billion yuan as some smaller developers have been forced to seek alternative financing for their development projects amid continued credit tightening measures.

In fact, the rapid growth in new trust loans appears to have tracked the changes in central government monetary policies itself, which have gone through an easing-to-tightening cycle in less than three years.

Global interest rates have stayed at ultra-low levels on increasing money supply, mainly resulting from the launch of economic stimulus packages on the mainland at the end of 2008 and quantitative easing in the US in response to the global financial crisis.

Disappointed at the extremely-low interest rates, investors (from various sectors) have scrambled to throw their money into property projects in the hope of higher returns, leading to rising risks of an asset bubble in the property sector, which could threaten the economy.

To curb the asset bubble risk, the central government reversed its accommodative monetary policy to a tightened one last year, mainly by gradually raising the reserve requirement ratio (RRR) to control credit expansion rather than by interest rate hikes, resulting in a severe negative interest rate environment and a credit crunch.

Coupled with the weak sentiment in the real estate market due to government tightening measures to cool down an overheating property market, the credit crunch has forced smaller developers to seek more financing channels, including trust loans which charge extremely high interest rates. The annual interest rates charged by some non-bank institutions on loans for non-mortgage purposes have reportedly reached as high as 15 percent.

After the boom in the first half of the year, growth in trust loans has been slowing since July, reflecting trust companies' concerns about the risk that some small and medium developers may face financial stress as their property sales are weakening amid poor sentiment in the property market due to government tightening measures.

Meanwhile, the banking regulator has recently ordered trust companies to report details of their lending to developers, signaling a possible crackdown.

It is still unclear whether this vital funding source for developers, particularly for small and medium-sized developers, will be totally severed in the near future by the regulator on risk concerns. Nevertheless, the recent slowdown in trust loan growth hints that the trend of slashing property prices would continue for a while as smaller developers have no choice other than cutting their selling prices or being acquired by bigger players.

However, sources have said that the top-ten listed developers posted a mild increase in their half-year cash balances, which totaled HK$171 billion. Therefore, the large developers may not face similar financial problems as smaller players, given their relatively strong balance sheets and liquidity.

Whatever the case may be, I still expect a 10 percent rise in the average price of private homes on the mainland this year.

The author is vice chairman and CEO of Vigers Group, an international property consultantcy. The views expressed here are entirely his own.

kennysvigers.com.

(HK Edition 10/25/2011 page2)