BEIJING (Reuters) - China's banking regulator sees "severe risks" from funds flowing into the real estate, coal and steel industries through the trust industry, a major part of the shadow banking sector, two sources with knowledge of the matter said on Thursday.
Deng Zhiyi, head of the Trust Department at the China Banking Regulatory Commission (CBRC), recently told trust firms at this year's work meeting that the risks may be higher than originally estimated, the sources told Reuters.
Deng said some trust firms did not fully transfer credit risks to investors, due to insufficient disclosure of information, as well as illegal guarantees made on principal and interest payments.
Some trust companies also misclassified risky assets and lacked sufficient provisioning and capital, he added.
Since 2016, trust products related to property, coal, steel and other excess-capacity industries have been facing rising credit risks, Deng said, particularly as corporate leverage, client concentration rates and defaults were all on the rise.
Deng urged the trust firms to pay special attention to the illegitimate use of real estate trust products to bypass loan restrictions by the banking regulator, according to the sources.
He also warned trust firms not to illegally accept local government guarantees, which would increase the "invisible debt" burden of local governments.
The outstanding volume of risk assets of China’s trust industry reached 117.5 billion yuan ($17 billion) by the end of last year, for an increase of 20.2 billion yuan from the beginning of 2016, CBRC data showed.
Reuters could not immediately reach CBRC for comment.
At the meeting, Deng also told trust firms to strengthen their risk assessment and monitoring and pay special attention to concealed risks using methods such as product repackaging, non-standard fund pools and connected transactions.
"We will continue to clean up non-standard fund pools, and hold trust companies with poor enforcement responsible," Deng said, according to the sources.
Reporting by Li Zheng and Ryan Woo; Writing by Shu Zhang; Editing by Clarence Fernandez