China Revises Trust Industry Rules to Ease Controls on Foreign Investors

Chinese regulators are set to make it easier for overseas financial institutions to invest in China’s $3 trillion trust industry as the government revises industry administrative rules for the first time in five years.

The China Banking and Insurance Regulatory Commission Tuesday released for public comments a draft revision to rules for administering the country’s trust companies. It is the first revision to the document since June 2015.

Compared with the current rules, the revised version removes an article requiring foreign companies to have at least $1 billion in total assets at the end of the previous fiscal year to be eligible to invest in Chinese trust companies.

The revision is a meaningful move to adjust the framework regulation for the trust industry, although foreign investors are lukewarm about entering the market now, a trust company executive said.

As China steps up efforts to relax restrictions on foreign investment in the broader financial market, foreign institutions will be more interested in investing in China’s banking and mutual fund businesses, another trust industry manager said.

China’s trust industry became a focal point in the country’s crackdown on shadow banking and financial risks over the past several years. The once-freewheeling industry has fueled off-balance-sheet lending by acting as channels for banks to skirt regulations and tap risky lending activities.

In 2019, almost one-third of China’s trust companies were punished by regulators for a range of violations, including continuing to conduct illicit shadow banking business and illegal real estate investment.

In the latest crackdown, leading player Anxin Trust Co. Ltd. was punished by Shanghai’s banking regulator for illegally misappropriating investments in trust products, concealing product risks when promoting them to investors and creating huge payment risks by guaranteeing returns to some investors.

Total assets under management by the country's 68 trust companies stood at 21.6 trillion yuan (about $3 trillion) at the end of 2019, down 4.85% from the previous year and compared with 26.3 trillion yuan at the peak in 2017, data from the China Trustee Association showed.

Foreign investors account for only a small share of China’s trust industry. Seven of the 68 companies have foreign investors as minority shareholders. Japan’s Sumitomo Mitsui Trust Bank, Bank of East Asia, Bank of Montreal, JPMorgan Chase & Co. and Britain’s Ashmore Group are among investors in Chinese trust companies, each with 19.99% stakes.

The proposed revision also removes previous articles governing trust companies’ sales of bonds and subordinated bonds. Such financing methods have never been practiced by Chinese trust companies, although they were allowed to do so five years ago.

The changes reflect regulators’ determination to break institutions’ implicit guarantees of investment products management by curbing trust companies’ access to borrowing, an industry source said.

The revision also would make adjustments to tighten regulation of trust company shareholders, streamline their business operations and enhance oversight of the companies’ overseas businesses.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com)