Banking Regulator Eyes Overlooked Trust Product

China’s banking regulator has decided to extend its oversight to a so-far overlooked type of trust product in an attempt to further clamp down on financial risks stemming from the business that banks and trusts do together, the regulator announced Friday.

The bid to bring what are called “property trust products” into the regulatory fold underscores the China Banking Regulatory Commission’s (CBRC) determination to tighten its grip on the two biggest financial sectors in China.

For a long time now, China’s banks and trusts have controlled the two largest amounts of assets in the financial sector. As of the end of September, China’s banking institutions managed 247 trillion yuan ($37.6 trillion) in assets, followed by trusts, which managed 24.4 trillion yuan in assets, according to data from the CBRC and the China Trustee Association.

Of the kinds of business that banks and trusts do together, the regulator has grown concerned about a common type called “channel lending,” in which banks take over management of trust products and bear the entire risk of potential losses. The trusts simply serve as a channel for the money.

Property trust products, in which banks entrust their existing assets or property rights to trust companies, can be used to facilitate channel financing. Channel financing or lending, is permitted under Chinese law, but the CBRC wants more stringent requirements on it.

In Friday’s announcement, the CBRC advised banks to beef up risk controls on the business they do with trusts and warned them not to bypass investment rules.

In one typical example of the business that banks and trusts do together, a bank collects money from its customers by selling them wealth-management products and then uses the money to invest in trusts, through which they can indirectly issue loans to companies.

The type of business has created an alternative financing channel for business restricted from borrowing directly from banks. In particular, local government financing vehicles and real estate projects have benefited from the arrangement.

In its announcement, the CBRC reiterated that funds collected by bank-trust products cannot be invested in real estate, government financing vehicles or the stock market “in an illegal way.”

Shortly after CBRC Chairman Guo Shuqing took up his post earlier this year, the regulator rolled out seven guidelines governing how banks do business, including their business with trusts. The guidelines aimed at cracking down on the shadow banking sector and specifically addressed channel business.

Contact reporter Lin Jinbing (jinbinglin@caixin.com)