The flow of cash into property investment products issued by trust companies has slumped since September, as embattled property giant China Evergrande Group's debt woes deepened.
That in turn is shutting one of the remaining funding channels for property developers who are already suffering from strict lending curbs onshore and record borrowing costs in the offshore bond market.
"Previous investment logic has collapsed," said Shanghai businessman Desmond Pan, who is considering shifting millions of yuan in property trust products into Bridgewater's China fund called All Weather Enhanced Strategy.
Sifting through a brochure with billionaire founder Ray Dalio's smiling face and a smooth and rising performance curve, Pan reckons the multi-asset fund, with an annualised return of 19%, is a suitable investment substitute.
Chinese investors have long had a penchant for real estate investments but the money flowing into property investment products has been shrinking in recent years since Beijing started to curtail shadow banking in 2017. Evergrande's default on wealth management products (WMPs) in September, which triggered investor protests in many cities, only accelerated that trend.
At the end of June, trust money that invests in real estate totalled 2.1 trillion yuan ($329.3 billion), down 17% from a year earlier. In contrast, trust products investing in securities such as bonds and stocks jumped 35% to 2.8 trillion yuan, according to the China Trustee Association.
The rotation of money picked up pace in recent months, with fundraising by property-related trust products slumping 38% in September from the previous month, and 55% in October, according to Use Finance & Trust Research Institute.
"Property-related trust products don't sell these days, and we see clients step up shifting money into funds with relatively stable returns, such as fund of fund (FoF), and 'quant funds'," said a FoF manager at Shenwan Hongyuan Group, who declined to be identified as he is not authorised to speak to the media.
Quant funds, or quantitative funds, employ software to automate investment decisions and often generate higher returns than bonds but carry less risk than stocks.
"Chinese policies are nudging capital away from real estate, which is absolutely positive news for the asset management industry," said Jason Hsu, founder and chairman of Rayliant Global Advisors, which recently launched a multi-strategy hedge fund in China that uses quantitative analysis.
Shi Ke, a partner at Shanghai iFund Asset Management Co, a quant hedge fund house, agrees: "You need to cautious with property investment products. The risk of default is growing."
According to Citi Securities, China's quantitative private funds have grown to 1 trillion yuan ($154.6 billion) in recent months. That is almost 10 times their size in 2017.
Besides trust products, real estate wealth management products sold through banks or independent wealth management companies have also suffered after defaults at Evergrande and more recently a liquidity crunch at developer Kaisa Group.
Jianda Ni, chairman of real estate-focused wealth management company Jupai Holdings, says there has been an irreversible shift of investment toward equities in sectors such as technology and new energy, and away from debt issued by developers.
The firm, which distributes products to fund projects by Yango Group Co, Kaisa and Guangzhou R&F Properties Co, said it continues to diversify its product line and introduce more equity, overseas and secondary market products.
Rival Hywin Holdings Ltd, which distributes products to fund projects by developers including Evergrande, told Reuters in September it aimed to reduce its reliance on real estate by expanding new products and growing businesses offshore. When contacted for comment, it did not provide further details.
Liang Dongqing, head of wealth management service at China International Capital Corp (CICC), told a conference in October that while real estate remains the biggest component of the Chinese household balance sheet, the demographic and liquidity drivers behind China's property bull cycle have gone.
"Guiding clients to shift some of their existing wealth away from real estate, and reallocate assets to share China's future economic growth, represents the biggest opportunity for wealth managers over the next decade."
($1 = 6.3776 Chinese yuan)
(Reporting by Samuel Shen; Additional reporting by Vidya Ranganathan in Singapore; Editing by Jacqueline Wong)
By Samuel Shen and Vidya Ranganathan