Caixin
Apr 23, 2018 08:15 PM
FINANCE

Trust Firms Given Deadline to Quit Risky Business

The president of a state-owned trust company told Caixin he thought it would be “very difficult” for firms to exit all nonstandard asset investments financed by funding pools in three years, as regulators want. Photo: VCG
The president of a state-owned trust company told Caixin he thought it would be “very difficult” for firms to exit all nonstandard asset investments financed by funding pools in three years, as regulators want. Photo: VCG

*Trust companies told they will be given three years to exit such investments that are seen as particularly dangerous

*Deadline from the China Banking and Insurance Regulatory Commission marks the first time that authorities have spelled out a fixed time frame

(Beijing) — As regulators step up their campaign to rein in financial risks, they are taking another stab at crushing trust companies’ continued investment of pooled money raised via wealth management products in nonstandard assets.

Authorities have put trust companies on notice that they will be given three years to exit such investments that are seen as particularly dangerous. The mismatch in maturity between the underlying assets, which tend to be long-term investments, and the funds raised to invest in them, which usually come from short-term wealth management products, exposes a liquidity risk that could ripple through the broader financial system.

The deadline was spelled out by Deng Zhiyi, an official with the China Banking and Insurance Regulatory Commission (CBIRC), at a trust industry work meeting last week, and marks the first time that authorities have spelled out a fixed time frame. The ban comes under the new regulatory framework for the country’s $15 trillion asset-management industry, which is set to be issued in the next few weeks.

But watchdogs appear to be taking a softer line with trust companies over their use of pooled funds for investment in nonstandard assets — in general, financial institutions are expected to be given only 18 months to comply with the rules in the new framework.

The president of a state-owned trust company told Caixin he thought it would be “very difficult” for firms to exit all nonstandard asset investments financed by funding pools in three years. Some funds have been used to cover losses from bad loans, and a heavy-handed clampdown may cause a liquidity crunch at firms that have a large exposure to the practice, he said.

Liquidity risks

Regulators have been trying since April 2014 to stop trust firms’ selling wealth-management products (WMPs) and pooling the proceeds into one fund that is then used to buy what are known as nonstandard assets. These are illiquid long-term assets that are not traded on the stock, bond or money markets and are often loans to companies that can’t get credit from banks, such as small real estate developers and local government financing vehicles.

The funding pool is topped up with the proceeds of new WMPs, and trust companies use it to repay maturing WMPs that funded the investments, posing a significant liquidity risk in the event there is not enough money in the pool. The high-risk nature of the investments, reflected in the high yields trust companies are able to earn on their money, means the chances of an investment going bad are greater, which threatens the repayment of funds into the pool.

Although there are no definitive figures for the size of the business, when the crackdown first started in 2014 with a ban on new investments of this kind, the outstanding value of the funding pools was widely estimated by industry insiders to be in a range of 200 billion yuan (about $32.5 billion at the time) to 300 billion yuan, or 1.4% to 2.1% of the total value of assets under the management of trust companies at the end of that year.

These funding vehicles are popular among trust companies because they can use the cash from the pools, instead of their own capital, to cover bad loans. They can also make a good profit from the spread between the yields they offer on the WMPs and the returns they get from their investment in the nonstandard assets.

Some companies have been caught defying bans on new investments in nonstandard assets using pooled funds.

Ping An Trust, a subsidiary of Ping An Insurance Group, China’s second-largest life insurer by premium income, was fined 9.8 million yuan (about $1.5 million at the time) in December 2015 for continuing to invest proceeds from its WMP funding pool in nonstandard assets. AVIC Trust, controlled by state-owned aircraft maker Aviation Industry Corp. of China, was given a 200,000 yuan fine in December after the value of its funding pool was found to have increased.

China’s trust industry has grown significantly over the last few years amid a boom in shadow banking. Total assets managed by trust firms ballooned 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 by regulators under orders from President Xi Jinping to force financial institutions to reduce their leverage. The outstanding value of trust assets is 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.

Contact reporter Fran Wang (fangwang@caixin.com)

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