Increased trust holdings raise risks for insurers

"If the bond market can supply enough AAA-, AA-rated corporate bonds, insurance companies won't need trust products," said Jian Li, an analyst at Macquarie Group Ltd in Hong Kong.

"But the corporate bond supply is still not enough, so insurers need more choices to diversify their investment portfolio and improve returns."

Trust companies, whose assets have swelled fourfold since 2010 to 12.5 trillion yuan by June 30, are part of China's shadow financial system that operates beyond regulators' control on bank leverage.

Fifty-one percent of insurers' trust investments were directed to infrastructure and property, while the proportion was more than 90 percent for at least eight insurers identified by the CIRC.

China's new home prices fell last month in 69 of 70 cities monitored by the government, the most since January 2011 when the government changed the way it compiles the data. Home sales slumped 11 percent in the first nine months of this year.

"If there are any market-wide problems with property developers, that might lead to some defaults on trust products," said Fitch's Wong.

"The situation could be even more complicated. Trusts are only one of the product lines. Insurers may even have some property-related stocks and they themselves may also have some investments in the sector."

China Pacific Insurance (Group) Co, the nation's third-biggest listed insurer by assets, boosted its investments, including in wealth management products and trusts, by 638 percent in the last three quarters to 10.2 billion yuan.

At least 10 trusts backed by assets, spanning coal mines in Shanxi province to forests in Fujian province, have had issues with repayments, sparking protests by investors outside banks that distributed their products.

China Credit Trust Co delayed payments on a 1.3 billion yuan high-yield trust product backed by coal mining assets after the borrower failed to raise funds to repay investors in July.

A Shanghai Goldstate Brilliant Asset Management Co wealth management product missed a payment in August.

Lower economic growth is also adding pressure to trust products, which are often sold to fund companies that are unable to obtain bank loans.

China's economy expanded 7.3 percent in the third quarter, the slowest pace since 2009. Haitong Securities Inc estimated in July that 6.3 trillion yuan of trust payments would be due next year, more than this year's 5.2 trillion yuan.

The Chinese currency has gained 0.6 percent in the past month, China Foreign Exchange Trade System prices showed. Credit-default swaps insuring the nation's debt against nonpayment, dropped 25 basis points from this year's highest level reached in January to 80.4 basis points on Tuesday.

China's shadow banking shows signs of stabilizing	Investors turning to Chinese bonds for better yields