China’s Trust Companies Told How to Ditch Risky Assets
China’s banking and insurance regulator outlines four ways for trust companies to dispose of risky assets amid concerns about mounting threats in the $3 trillion sector.
The China Banking and Insurance Regulatory Commission (CBIRC) in a notice specified four asset-disposal avenues for trust companies. They include selling directly to professional institutions, transferring assets to special purpose vehicles, entrusting asset management companies to dispose of investments, and selling assets to trust guarantee funds, which would then engage the trust companies to manage and dispose of them on behalf of the funds.
China has been tightening regulations governing the trust industry to help contain financial risks in a key area of the shadow banking sector that has become an increasing concern for authorities after a series of scandals and defaults. As of the end of 2019, about 2.67% of trust industry investment, or 577 billion yuan ($90 billion) on 1,547 projects, was deemed risky, official data showed.
Slowing economic growth and the fallout from the Covid-19 pandemic have increased financial pressure on the corporate sector, which has had a knock-on effect on the health of the trust sector.
Many trust companies have already started to dispose of risky assets using the CBIRC’s first three methods, and the official document means that the regulatory commission supports and encourages the practices, according to a senior manager at a trust company.
The fourth approach — acquisition by trust guarantee funds — represents a new model that regulators want trust companies to explore, industry experts said. Previously, trust guarantee funds mainly provided liquidity support to trust companies.
Under this model, trust companies could move risky assets off their balance sheets, but the acquiring trust guarantee funds wouldn’t need to hire special personnel to manage the assets, the senior trust company manager said.
The CBIRC notice clarifies the various disposal methods and stipulates the accounting treatment required under the different modes, providing clear guidance for trust companies to resolve risky-asset disposal problems, a trust industry participant said.
Trust companies should strengthen asset valuation management, introduce market-oriented competition, clarify loss-sharing mechanisms and enhance loss compensation ability, the CBIRC said.
When disposing of risky assets, trust companies may face the threat of greater losses in the short term, which may have a significant impact on their earnings in the current year, the trust industry participant said.
China’s trust companies managed 21.6 trillion yuan ($3.1 trillion) as of the end of 2019 and invested in a wide range of assets including bonds, stocks, loans to private companies and local government financing vehicles.
Contact reporter Denise Jia (email@example.com) and editor Bob Simison (firstname.lastname@example.org)
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