Banking & Finance

Not to be trusted?

Some think them a timebomb. Here’s a quick guide to trust companies

Not to be trusted?

Financed by a trust company?

Chinese trust companies have been in the news a lot lately. Below, WiC explains why they’ve grabbed headlines.

What are trust companies?

China’s distinct brand of trust companies create investment products, which they then sell to wealthy individuals in search of high returns. They cannot take deposits, but the products they create often help private companies raise cash. The Financial Times describes them as operating in a “murkier realm where the official banking system meets the shadow banking system”.

How long have they been around?

The first trust was founded in 1979 (China International Trust and Investment Corporation), but by the late eighties there were around 2,000. According to the Oriental Morning Post, trust companies emerged to help local governments propel economic growth during the early years of Deng Xiaoping’s reforms.

Unlike the big state banks, these “secondary banks” had more flexibility to finance projects. However, in the wake of a series of scandals the bulk were closed a decade ago, most famously the fraudulent Guangdong International Trust and Investment Corporation (GITIC).

The industry then underwent a thorough restructuring in 2002, so that only 52 of the ‘better’ trusts remained. But the government didn’t want to get rid of them entirely as they have often been useful tools to further state policies. For example, during the pre-IPO restructuring of the big Chinese banks, trust companies were used to alleviate some of the banks’ capital concerns, by hiving off some of their loan books.

Which is the biggest?

CITIC Trust is the largest player, followed by Zhongrong International Trust and Ping An Trust. The sector has been lively in recent years, enjoying 70% annual growth, reckons China International Economic Consultants. As of December total assets reached Rmb3 trillion, with the industry making aggregate profit of Rmb15.8 billion ($2.4 billion). However, trust assets still only constitute 2.35% of the funds managed by the Chinese financial sector as a whole.

Why are they so newsworthy?

WiC first reported on the trust companies in issue 53. Last year it became evident that China’s major banks were using the trusts to get round loan quotas set by the central bank. In WiC74 we noted that such loans (in large part to real estate developers building luxury housing) had grown by Rmb1.3 trillion. The regulator worried that such securitisation efforts could undermine the stability of the financial sector. So the CBRC clamped down, telling the banks to bring the repackaged loans back onto their balance sheets, and placing capital requirements on trusts to make these ‘trust lending’ structures uneconomic.

Then last month the FT reported that a number of foreign financial firms were preparing to apply for trust company licences too: so as to grow their businesses more speedily in China. Foreign investors were keen, wrote the FT, because trust vehicles are less heavily regulated and can offer a wide range of financial services plus can invest their own capital.

Since then the trusts have hit the news again. The 21CN Business Herald reports they are to be used to help finance the construction of 36 million ‘affordable’ apartments over the next five years. (To put that in perspective: last year the UK built 22,000 units of ‘social’ housing.)

Beijing has acknowledged that local governments do not have sufficient funds to finance this effort alone; so one idea being floated is for the nation’s Social Security Fund (it manages $130 billion) to give trust companies cash, which in turn they can lend to property companies constructing the new ‘cheap’ housing. At this point there are no details as to how they will share the profit (or the risk).

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