Trust association in the works
By Zhao Renfeng (China Business Weekly)
Updated: 2004-09-17 14:06

China's first trust industry association is likely to be launched within two months to enhance the development of the once-trouble-laden sector, suggest industry sources.

The association has received approval and will, in the near future, draft its charter and code of ethics.

After its establishment, communications between trust firms, investors and regulators should be well channeled, sources said.

Establishment of an industry association has long been desired by trust companies. The move is an essential step for China as it nurtures the fledgling industry and helps it to grow on a smooth track.

Wang Lianzhou, a renowned expert on financial laws and a member of the drafting committee of China's trust law, told China Business Weekly the establishment of a trust industry association has been widely anticipated.

He said a well-framed organization can help unite all the industry's participants.

But, he added, China must upgrade the administrative level that regulates the trust industry.

"The government department that currently supervises trust companies in China ... is only at the division level, much lower than the ministry-level organizations that oversee the banking, insurance and securities industries," Wang said.

"The trust industry is also a very important sector. Its importance should be better recognized."

China's trust industry started to boom again last year, after it had been restructured five times in the previous decade.

Many trust companies, since last year, have promoted new trust plans, which took into consideration the huge market potential as a great number of Chinese wanted diverse investment channels.

As most trust projects in China are currently based on infrastructure and real estate projects, experts are seeking greater room for improvements to trust products.

"China has too few trust products right now," said David Hayton, member of the Trust Committee of Greater Britain and Wales.

"Concentrating on securities and real estate projects could be very hazardous."

Trust innovations should be widely applied to the pension and insurance sectors, he suggested.

Pension trusts, for example, can be a very good solution for companies and government departments in China, which has a rapidly ageing population.

An endowment insurance trust can help policies' beneficiaries avoid paying inheritance taxes.

Hayton, also a senior consultant with Beijing-based RayYin & Partners, predicted trust companies will eventually be allowed to invest in overseas bonds and equities, and possibly art collecting.

However, "these methods still look unpractical at the moment," he said.

There have been increasing calls for the Chinese Government to lift the market threshold so more players besides trust companies can enter. But the premise, Hayton said, is there are enough lawyers and professionals capable of doing the business.

China needs a trust industry regulator with broad experience in monitoring the sector. However, the nation's regulation over the industry is in the initial stages.

In other regions, such as the United Kingdom, where the trust industry originated hundreds of years ago, banks and insurance companies are strong players in the trust market.

But China's banks and insurance firms are still not permitted to make such cross-industry investments, because existing regulations do not allow them to invest in other financial arms, including insurance, securities and trust businesses.

That situation is due to the segregated regulatory system within the nation's financial industry.

"I was very surprised, initially, that in China only trust companies are allowed to do trust business," Hayton said.

"It would be a safe practice. But China needs to loosen the restrictions later when the market matures."

Some media have reported China's commercial banks will be allowed to buy into trust and investment firms. That would be a breakthrough in the segregated regulatory scheme in the nation's financial sector.

Chinese Government will then need to issue a regulation on the implementation of administrative permission concerning trust and investment firms.

That will make it possible for qualified commercial banks to become shareholders in trust and/or investment companies.

The banks would have to meet criteria in capital adequacy, creditability and profitability.

The overall outward investments of the banks could not exceed 20 per cent, the Economic Observer newspaper recently reported.

Securities, insurance, financial and leasing firms could also invest in trust firms, provided they meet the standards.

Altering regulations to allow for different types of financial firms to invest in each other has become a trend in China, and authorities will have to ease controls as the market environment changes, experts said.

But the experiment must be carried out with proper regulations.

Paul Matthews, professor with King's College London, said good consideration of future trends in the trust market is essential when promulgating rules and regulations.

He said the rules should not be changed frequently.

"Industry practitioners should be well informed, and then understand what to do and what not to do all the time," he said.

China's first trust law, adopted by the National People's Congress, the country's top legislature, in April, 2002, took effect on October 1 that year.

The law, which covers the rights and duties of trustors and trustees, has led to a series of changes in China's trust businesses.

But the laws and regulations governing China's trust industry are still insufficient, Hayton said.

Britain, for example, has concrete, detailed protection rules, and courts often play a very important role in rendering remedies, he said.

Chinese rules, he continued, are simple in comparison.

Twenty years ago, China's reform and opening policy led to a prosperous era, when about 1,000 trust companies mushroomed in the country.

However, the absence of relevant legislation and/or guidelines led to numerous problematic cases, such as Guangdong International Trust and Investment Corp.

In 1998, the company, due to irregularities and poor management decisions, was China's largest State-owned enterprise to go belly up. It lost close to US$2 billion.

A series of default-payment scandals and irregularities forced Chinese authorities to shake up the industry five times. Now, about 50 companies still operate, but many were closed.

The alarm was sounded again in the industry two months ago when Jinxin Trust and Investment Co defaulted on the repayment of a trust product.

Jinxin, which is based in Northwest China's Xinjiang Uygur Autonomous Region, was unable to repay investors after the trust had matured.

Although that was a rare example, it stressed again that risk concerns must weigh heavily on regulators' minds, even though step-by-step innovation is encouraged.

Matthews said Britain's mature trust market has benefited greatly from its 600-plus-year history.

Apart from rigid rules and regulations, a rich trust culture plays an important role in nurturing the market.

"Your grannie can make delicious cakes, but she may not be able to pronounce a recipe. It's the same with the trust industry," Matthews said.

"There are always unwritten rules and professionals and lawyers need their experiences to judge various cases."

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