China's trust firms, with total assets of $2.2 trillion, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans - blunting regulators' efforts to reduce shadow banking risk.
By redirecting money into capital markets and OTC products like asset-backed securities (ABS) and bankers' acceptances, trusts are acting less like lenders and more like hedge funds or lightly regulated mutual funds.
And the shift - a response to a clampdown last year on trust lending to risky real estate and industrial projects - means a significant chunk of shadow banking risk is migrating rather than shrinking.
China trusts take in funds from retail and institutional investors and re-lend or reinvest that money, often in parts of the economy that struggle to obtain bank credit, like mid-sized private enterprises or municipal industrial projects. As of end-2014, total trust assets were 14 trillion yuan, according to China Trust Association data.