Everbright Unit Suspends Loan-Type Trust Business

Everbright Xinglong Trust Co., a unit of China’s state-owned financial services conglomerate China Everbright Group, has suspended its loan-type trust business as regulators slam the brakes on trusts that serve off-balance sheet lending activities.

Everbright Xinglong issued an internal notice on Feb. 23 ordering its regional branches to suspend raising funds through collective trust plans to invest in loans till the end of March, according to people close to the matter.

A collective trust is a pool of funds handled by trust companies on behalf of multiple investors.

Everbright Xinglong took action because its loan-type trust business, which accounted for about 28% of the outstanding value of collective trusts under its management, was approaching the regulatory limit of 30%.

The move comes as China’s financial regulators tighten scrutiny on the trust and asset management sectors. These are the two main sources of funding in China’s shadow banking system, which facilitates lending outside the formal banking system.

A trust industry analyst said the regulatory clampdown comes amid regulators’ concerns that trust firms have used such business to help banks bypass lending rules and extend excessively risky loans.

At a meeting in late January, the China Banking Regulatory Commission pledged to put greater effort into reining in the trust channeling business, in which trust firms act as intermediaries to facilitate lending for banks, other financial institutions or individual investors. Also, China Securities Regulatory Commission has ordered a ban on investing collective asset management plans into entrusted loans, trust loans and other non-standard credit assets, separate sources told Caixin.

Amid stricter scrutiny, the trust industry has seen a significant decline in the collective trust business since the beginning of this year.

In January, the industry issued a total of 958 collective trust plans in the amount of 161.8 billion yuan ($25.6 billion), data from Usetrust.com showed. The total number dropped by 37.6% from December and the amount plunged by 55.5%.

An industry expert said that this January’s declines were sharper than the same period in 2017, reflecting the impacts of tighter regulation.

China’s trust industry had been skyrocketing in recent years, with total assets managed by trust firms ballooning from less than 8 trillion yuan in 2012 to more than 24 trillion yuan in 2017, according to data from the China Trustee Association (CTA).

But experts expect the growth to slow amid tightened control. The size of trust assets are expected to decline by at least 2 trillion yuan this year, an industry source told Caixin. Another source close to the regulators said authorities are hoping the industry can reduce its assets by half.