China Tightens Oversight of Trusts as Default Risk Rises
China’s banking regulator ordered owners of the nation’s 68 trust companies to be prepared to provide funding or sell their stakes as the risk of defaults rises in the $1.9 trillion industry for high-yield investment.
The China Banking Regulatory Commission told trust companies to either restrict their businesses and reduce net assets or have shareholders replenish capital when the firms suffer losses, according to an April 8 notice that was seen by Bloomberg News. The regulator will also impose a “strict” approval process on trust firms’ entry into new businesses and products starting this year, according to the document.
China is stepping up regulation of the industry after the nation in January avoided what would have been its first trust default in at least a decade. About 5.3 trillion yuan ($853 billion) of products are due to mature this year, up from 3.5 trillion yuan in 2013, Haitong Securities Co. (600837) estimated in a January report, warning that firms can no longer shoulder all the risk tied to implicit guarantees associated with the trusts.
“We will see a peaking of trust-product maturity in the second quarter, so it’s very timely to have more regulation in place,” Huang Wentao, a Beijing-based analyst at China Securities Co., said by phone. “The central government is committed to rein in any risks before they turn into a systemic crisis.”
The banking regulator indicated in the notice that the statement was being distributed to all CBRC branches and trust companies that it oversees. The CBRC also banned individuals from using money that’s not their own to purchase trust products, which typically require a minimum investment of 3 million yuan. The regulator urged trust companies to fully disclose risks during their sales process and move toward using tape or video recordings to keep records.
By offering better returns than bank deposits, trusts have gained popularity among China’s wealthy investors and overtaken insurance to become the biggest segment by assets of the country’s financial industry after banks. Trust assets surged more than fourfold from the beginning of 2010 even as policy makers sought to curb money flows outside the formal banking system.
The industry’s growth makes more investors vulnerable to losses as China’s slowing economy makes it more difficult for borrowers to repay their debt.
At least 20 trust products have run into difficulty making payments since 2012, according to Beijing-based China Securities. All have avoided default as issuers or third parties such as state-owned bad-loan managers and guarantee firms eventually repaid investors in full.
Investors in a 3-billion-yuan trust product issued by China Credit Trust Co. and distributed by Industrial & Commercial Bank of China Ltd. (1398) to fund a coal miner were bailed out by an unidentified person or group days before its maturity in January. Last month, Jilin Province Trust Co. missed payments on a 973-million-yuan product as Shanxi Liansheng Energy Co., the borrower drawing on the trust’s funds, underwent a local government-led plan to restore profitability.
The CBRC told its local branches to monitor risks in areas including local government financing vehicles, real estate, mining and industries with excessive capacity, according to the document from the regulator.
Trust companies should establish a mechanism to deal with crises, including delaying executives’ incentive compensation, restricting dividend payouts and disposing some businesses. The regulator is also studying the establishment of a trust stability fund to avoid systemic shock from the failure of any institutions, according to the document.
Trust firms should also submit by June 30 plans to unwind pools of non-tradable assets managed by the companies, a business that had “shadow-banking characteristics,” the CBRC said. Any newly issued products need to be reported to the banking regulator 10 days before sale, it said.
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