China's local governments turn to trust firms for funds
Staff Reporter 2012-09-19 13:29
A trust company in China. (Photo/CNS)
Trust companies are becoming a vital source of financing for cash-strapped county-level governments in China that are unable to secure bank loans to finance their infrastructure construction projects due to the central government's tight monetary policy.
Zhao Baujun, the head of a financial and investment vehicle of a county government in the eastern province of Anhui, said his company had raised 160 million yuan (US$25.3 million) through Anhui Guoyuan Trust Co in the past six months.
The Guangzhou-based Southern Weekly said the interest rate for two-year trust loans was as high as 12% per year, almost double the benchmark interest rate on bank loans.
Though small loans may not help the company, whose net assets are 3 billion yuan (US$474 million) and existing debt is 3 billion yuan, Zhao said they had no choice but to take the loan.
While many urban development projects have been launched in more than 2,000 counties across China, the central government has increased the restrictions on borrowing by local governments. Since August 2010, several commercial banks began recovering their loans to Zhao's companies, although three strategic banks also provided five-to-eight-year loans to the financial vehicles of local governments.
The financial companies of local governments have uninhibitedly taken such loans because these banks charged only the benchmark interest rate on these loans. However, these funds could not completely meet the local governments' need for finances.
Moreover, the government imposed stricter controls on financing channels, putting county governments under heavy financial pressure due to shrinking revenues from land sales and the large debts incurred by their financing vehicles.
With few funding channels available to county governments, these governments have turned to trust companies as a major source of funding.
The report said that as of Sept. 12, Anhui Guoyuan Trust had launched 45 financial projects through the financial vehicles of county governments, accounting for 60% of all projects, compared with the 30% registered in the whole year of 2011.
China's top two trust business revenue earners in 2011 — Zhongrong International Trust Co and China International Trust and Investment Corporation (CITIC) — also shifted their focus to this new sector.
Since the minimum threshold for investing in financial products was raised to 1 million yuan (US$158,000), trust companies have been targeting individuals and institutions with high net value as their clients.
Through this financial channel, large sums of money have been injected into infrastructure construction in cities.
