Regulators Turn the Screws on Trust Financing as Risks Mount
As risks mount in China’s trust sector amid the fallout from the coronavirus pandemic, the country’s banking and insurance regulator is stepping up efforts to rein in trust financing, informally telling some institutions to cut their exposure to the business ahead of new regulations to control how they manage client funds.
Trust firms including Zhongrong International Trust Co. Ltd., China Minsheng Trust Co. Ltd., Northern International Trust Co. Ltd. and Guotong Trust Co. Ltd., have received window guidance to downsize their trust financing business according to tailored specifications provided by the regulator, multiple sources have told Caixin. Trust financing involves providing loans to businesses that are packaged into trust products and sold to investors.
The unofficial orders from the China Banking and Insurance Regulatory Commission (CBIRC) follow a surge in demand for loans as companies scramble for cash to help them weather the impact of the Covid-19 outbreak or to repay maturing loans. Many businesses are turning to the shadow banking industry, and trust companies in particular, as they are often unable to get loans from commercial lenders.
This is not the first time the regulator has sought to control the trust financing business. In March, a number of trust firms received (link in Chinese) window guidance to curb the business.
China has 68 authorized trust companies and at the end of March, the total outstanding value of financing-related trust products stood at 6.18 trillion yuan ($872 billion), accounting for about 29% of all trust products and up from 5.83 trillion yuan at the end of last year, according to data (link in Chinese) from the China Trustee Association, the industry’s state-backed self-regulatory body.
The window guidance was issued as the CBIRC is preparing regulations to put the country’s $3.1 trillion trust industry under closer oversight. The draft rules, which were put out for public comment in May, will govern how trust companies manage client funds, clarify requirements on trust products and toughen regulation of their loan-related investments.
The new draft rules will cap trust companies’ total investments in so-called nonstandard credit assets — assets such as loans which cannot be easily valued or sold — at 50% of the total funds they raise from investors. Trust companies can invest no more than 30% of their net assets in nonstandard credit assets backed by the same company and affiliates, according to the draft rules.
Some major trust firms, such as Citic Trust Co. Ltd., have already suspended their business in nonstandard credit assets. However, scandals that have emerged in recent months such as Anxin Trust Co. Ltd.’s misappropriation of investments in trust products and Sichuan Trust Co. Ltd.’s default on its trust-of-trust products, may have added to regulators’ growing concerns.
While restrictions on the trust financing business will help companies improve their internal risk management controls, those that have already built up significant exposure to the higher-risk nonstandard assets may have difficulty reducing their holdings. An executive at one trust firm said that limiting their ability to roll out new financing-related products was akin to having banks stop issuing new loans, and could have the unintended consequence of increasing their overall risk exposure and making asset allocation more difficult.
Han Wei contributed to this report.
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