Chart: Channeling Business Tapers

Following years of rapid growth, the size of trust firms’ channeling businesses, a cornerstone of China’s “shadow banking” system, is showing signs of tapering off.

Trust firms can act as intermediaries to help facilitate lending for banks, other financial institutions or individual investors. In a typical example, a bank invests capital from wealth management products sold to customers into trust products, which can then be funneled to borrowers that are unable to obtain loans from banks, such as local government financing vehicles and real estate developers. Banks bear the risk, while trust firms channel the money.

Data released by China’s banking and insurance regulator earlier this month showed that assets managed by the country’s 68 trust companies via the “channeling business” totaled 14.97 trillion yuan ($2.34 trillion) by the end of April, a decline of 4.3% from the end of 2017.

From 2013 to 2017, the size of trust companies’ channeling business rose to 15.6 trillion yuan from 1 trillion yuan, with the share of total trust assets involved surging from less than 20% to nearly 60%.

Since last year, the banking regulator has issued a series of policies designed to rein in off-balance-sheet lending activities based on partnerships between banks and trust firms. The issuance of the long-awaited framework regulations for China’s $15 trillion asset management industry in April is expected to further curb channeling businesses with stricter requirements on leverage and the investment of asset management products.

Contact reporter Liu Xiao (liuxiao@caixin.com)