Trust firms banned from return promise
By Chuan Yu (China Daily)
Updated: 2004-12-07 09:05

China's banking regulator reiterated yesterday that trust companies must not promise minimum return to investors.

The China Banking Regulatory Commission (CBRC) said it issued a circular among trust firms, restating they are not allowed to either promise minimal yield to investors or guarantee the safety of their principal.

All trust companies must put up notices about the regulation at their outlets, expressly notify investors about it and must not mislead their clients, the commission said.

The move is the latest attempt by regulators to contain growing operational risks in the problem-prone sector, following four years of government-led restructuring.

In April, the CBRC cautioned against new risks accumulating in the trust industry, calling attention to irregularities at "some of the re-registered companies."

Fifty-seven trust companies completed a new registration process by the end of last year following the restructuring. But the new trust firms are becoming increasingly involved in the booming property market as real estate developers, frustrated by stricter bank loan policies, turn to trust deals to raise funds for new projects.

Some trust companies also promised minimum return to woo clients, which is illegal and is likely to lead to disputes, analysts said.

Once prices rise too high and real estate becomes unsalable, new risks are created, they said.

Chinese trust companies witnessed rapid growth in the 1990s, but mismanagement and rampant irregularities finally led to a painful industry-wide consolidation and the sensational closure of bankrupt Guangdong International Trust and Investment Company.

As a major part of the consolidation, the trust firms were required to boost their capital bases and trim non-performing assets resulting from their securities business, which they are not allowed to do now.

And with the regulatory environment getting warmer as the restructuring deepens, trust companies have gathered pace in launching new projects over the past two years, many of which are real estate trusts or financial trusts.

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