Written by Engin Tham, Claire Jim, and Julie Zhou

SHANGHAI/HONG KONG (Reuters) – For more than a decade, China’s debt-fueled construction boom has taken its toll on the country’s shadow banks, which have been eager to tap an industry desperate for credit and too risky for traditional lenders.

Now, in the wake of the government’s crackdown on the overindebtedness of real estate companies, that demand for credit has collapsed — and so has the single largest influx of revenue for shadow banks, also known as trust companies.

China’s shadow banking industry – worth around $3tn, roughly the size of Britain’s economy – is scrambling for new business, including private equity investment, family offices and asset management.

It’s also shrinking, as well-paid employees leave for other jobs after looking for new deals. The plight of the industry is a sharp contrast to China’s high-street financial firms, which have yet to be seriously affected by the crisis.

“Everyone was eating rice, living another day,” said Jason Hao, who quit his job this year at a Shanghai trust after his salary dropped from 4 million yuan ($570,000) to about 240,000 yuan. $34,000).

He now works for an asset management company.

Data from industry tracking website Yanglee.com shows that 1,483 trusted real estate-related products were sold in 2022 through the end of September, down 69.7% from 4,891 during the same period last year.

The value of 2022 deals was 117.2 billion yuan, down 77.9% from 531.3 billion yuan. Real estate products accounted for 8.7% of all trust products in September, compared to about 30% in the same month in the previous two years.

Three people with knowledge of the matter said the National Audit Bureau and China’s banking regulator have been reviewing credit companies’ accounts and deals this year for risk.

The National Audit Office and CBIRC did not respond to requests for comment.

At an internal meeting in October, an executive at Shanghai Trust, a state-owned company that was focused on real estate, said revenue had fallen by about half this year compared to the previous year, according to two people with direct knowledge of the meeting.

One person said the company plans to focus on asset management and family offices to shore up its finances while moving away from lending to developers, once its core business.

The Shanghai Trust did not respond to requests for comment.

Another trust company employee, like other current employees interviewed for this article, said that the top priority of all trust companies now is “how to transform, what will allow you to survive.”

pollution risks

Trust companies have been called “shadow banks” because of how they operate outside many of the rules that govern commercial banks. Banks in China sell wealth management products, the proceeds of which are funneled via credit companies to real estate developers and other sectors that are unable to tap bank financing directly.

Because of the risks, shadow banks can charge interest rates as high as 18%, much higher than the typical 2% to 6% seen in banks at the height of the boom.

Concerns about the huge exposure of real estate developers have grown this year as the embattled sector in the world’s second-largest economy slows rapidly.

Beijing has ramped up its support in recent weeks to undo the liquidity pressures that have choked the real estate market, which makes up a quarter of China’s economy and has been a key driver of growth.

Run out of options

In the trust unit of the state-owned China Construction Bank (OTC::) (CCB) and Zhongrong International Trust, formerly one of China’s largest shadow banks, investment such as private equity funds and venture capital are becoming more and more popular, as two people are familiar with first-hand companies said.

CCB Trust wants to invest in leading companies in specialized fields; It recently invested in Beijing Tianyishangjia New Material Corp., which makes materials used in train brakes, said a person who works for the company.

An executive there said Zhongrong International Trust is working with local governments, including Qingdao provincial authorities, to secure early-stage deals in smart manufacturing.

Jiangxi-based Avic Trust is investing in waste treatment companies, including financing photovoltaic power plants that they then lease, a person familiar with the matter said.

CCB Trust, Zhongrong International Trust and Avic Trust did not respond to requests for comment.

In some cases, trust companies buy projects from struggling developers and hire new managers to make up for their losses, according to corporate records and three people at the trust companies with knowledge of such acquisitions.

Corporate records and company announcements show that Ping An Trust, Zhongrong International Trust, Everbright Xinglong Trust and Minmetals International Trust have all purchased project companies from struggling developers in the past few months.

Ping An Trust, Zhongrong International Trust, Everbright Xinglong Trust and Minmetals International Trust did not respond to requests for comment.

For Hao and other former Trust employees, the companies’ search for stability seems familiar.

“I’m better off now than when I left the trust,” Howe said, “but I’ll never be as good as I was at the height of the boom when I was there.”

($1 = 6.9905 renminbi)

(Reporting by Engin Tham in Shanghai, Claire Jim and Julie Zhou in Hong Kong; Editing by Sumit Chatterjee and Jerry Doyle)