Since last July, several new trust products launched by re-licensed trust and investment companies (TICs) have received an overwhelming response from investors, especially small investors, who are attracted by the prospect of higher returns compared with other channels.

Analysts say these products mark a new spring time for TICs, although China still has a long way to go to establish a mature and healthy trust industry.

Spring time

The revival of investor confidence in trust products was music to the ears of one TIC - Shanghai AJ - which began operations on July 18 last year, the same day the Interim Rules on the Administration of Money Trust Business of TICs came into force.

The company won the tender to handle the investment operations of the city's Outer Ring Road Tunnel project and is responsible for a total 1.7 billion yuan (US$205 million) investment in the project, 1.2 billion yuan (US$145 million) of which has been through bank loans.

The remaining 550 million yuan (US$66.4 million) is being generated through AJ's trust scheme, the first trust product open to public since China re-licensed TICs a year ago.

The lowest trust value is 50,000 yuan (US$6,050) for a three-year term. When the term is over, the trustee gets back the entrusted money plus profit.

"We cannot promise them a guaranteed minimum profit, but our financial analysis shows that the yearly yield is estimated at 5 per cent," said Li Zhongcheng, an AJ spokesman.

The profit will come from the promised government subsidy of 9.8 per cent of the investment when the project is completed by the end of the year.

Despite the crisis of confidence in the trust industry in the past, small investors are showing an unexpected enthusiasm for trust products, because of the anticipated higher return, and the AJ project was sold within a week.

Four months later, the 188-million-yuan (US$22.7 million) valued investment trust product launched by the Shanghai International Trust & Investment Co Ltd (SITICO) for the city's Maglev train project sold out on the first day it was put to the market.

Investor zeal was beyond even SITICO's expectations, according to the company's deputy manager, Yu Miaogeng. He saw the government's involvement in the Maglev project as a reason for the popularity of the product.

"With support from the government, the trust product seems to be low risk with high profit," he said.

"Such trust products open a new channel for private equity to participate in the city's infrastructure construction," said Zhu Shiyin, president and CEO of the Shanghai government-owned Assets Operation. "Shanghai needs money from this sector to facilitate its massive infrastructure projects."

The two TICs are designing similar products to finance the city's infrastructure building programme.

Turbulent history

TICs, usually the fund-raising and investment arms of governments at various levels, were once considered the weakest part of China's finance sector.

The industry has gone through a turbulent period since its return to China two decades ago at the start of the country's economic reforms. However, the absence of legal regulation or guidelines for the industry created mounting problems.

In the late 1990s, domestic TICs, which had been favoured by foreign investors, were on the verge of bankruptcy when Asia's financial turmoil erupted in 1997.

The collapse of Guangdong International Trust & Investment Co Ltd, the second largest in the country, aggravated the situation. It was unable to service its 28 billion yuan (US$3.38 billion) in international loans, owed mainly to Japanese banks.

GITIC's case was followed by the collapse of international TICs in Hainan, Dalian and Tianjin.

At its peak, China had some 1,000 such investment companies nationwide but only 239 survived in 1999 when the central bank launched a restructuring campaign in the industry.

But these companies were not engaged in the trust business in the real sense of the word. Some were involved in non-trust business activities such as accepting deposits from individuals, or issuing international bonds without approval from the central authorities.

Citing rampant mismanagement and graft in 2001, the central bank ordered all domestic trust and investment companies to halt business, pending approval of their licences.

The industry received a green light when China's first Trust Law took effect on October 1, 2001.

The industry then went through a wave of closures and mergers and acquisitions. At the end of 2001, the People's Bank of China granted five trust and investment firms licences to resume business.

Only about 40 trust companies have survived the all-out campaign by the central bank to weed out under-achievers.

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