Rules to rein in trust companies

PUBLISHED : Friday, 10 September, 2010, 12:00am
UPDATED : Friday, 10 September, 2010, 12:00am

China is trying to rein in the rampant growth of its trust companies by introducing net capital requirements - one of a string of policies intended to build safety buffers in the financial sector after a lending spree last year.

The China Banking Regulatory Commission will introduce a system to evaluate the capital risk of trust companies, the regulator said yesterday. It also immediately issued a general rule requiring net capital to be at least 200 million yuan (HK$229 million) and 40 per cent of net assets at minimum.

The 54 trust companies which released annual reports last year showed they had average net assets of 1.88 billion yuan. Official registered capital figures are not available.

Analyst Yuan Lin of BOC International estimates current net capital at 87.3 billion yuan, and net assets at 109 billion yuan for China's trust sector.

That would indicate the trust companies meet the new standards. But Yuan said: 'The measure would restrict the asset expansion pace of trust companies and change their business model.'

Trust companies - which raise funds by offering various trust and wealth management products and then invest the funds in projects - had 3.04 trillion yuan in total assets at the end of June. A large portion of the funds have been invested in infrastructure projects including the property sector, Yuan said.

In a bid to help finance China's huge 4 trillion yuan stimulus package, banks extended an unprecedented 9.6 trillion yuan in new loans last year. They lent to projects, off their balance sheets, by using the money raised from issuing wealth management products jointly with trust companies.

The CBRC last month asked banks to move the off-book trust wealth management products, estimated at 2 trillion yuan in total, back to lenders' books to better regulate loans.

Liu Mingkang, head of CBRC, told bank officials recently that China must not overlook 'potential systemic risks' in its banking system. Liu also pressed for an improvement in the stress tests to assess banks' ability to withstand an increase in bad loans.

Analysts are worried about loan quality because many loans were extended to local government financing vehicles and property developers whose ability to pay off the loans has been called into question.

Minimum standards

The banking regulator has introduced new rules for trust companies

Trust companies are now required to have net capital, in yuan, of at least: 200m yuan