Developing trusts under harsh regulation in China

According to the figures on the main business of trust companies for the fourth quarter of 2017, released by the China Trustee Association, by the end of 2017 the balance of trust assets under the management of the 68 trust companies in China totalled RMB26.25 trillion (US$4.15 trillion), representing an increase of 29.81% over the same period last year and an increase of 7.54% over the previous quarter. The asset balance of account-managing-typed trusts accounted for as much as 59.62% of the total asset balance of trusts.

While the total of trust assets has been growing rapidly, the regulators – with a view to preventing and controlling risk, building a sounder financial regulatory regime and intensifying financial reform – have in succession issued a series of regulatory documents including the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (Draft for Comments), the Notice of the China Banking Regulatory Commission on Regulating Bank-Trust Business (document No. 55), the Notice of the China Banking Regulatory Commission on Further Intensifying Rectification of the Disorder in the Banking Market (document No. 4), and the Administrative Measures for the Entrusted Loans of Commercial Banks, since 2017. In conjunction with the issuance of the regulatory documents, local banking regulators in various regions have, on the basis of on-the-spot inspections of trust companies, taken penalty measures against a number of companies. In January 2018 alone, local banking regulators ticketed administrative penalties against seven trust companies, whereas a total of only nine tickets were issued against the entire trust industry in 2016.

The above-mentioned facts show that the tide of stringent oversight over the financial asset management industry has taken shape. In the previous column article, the firm had pointed out that the elimination of multi-level nesting and passageway business, shattering of rigid payment, elimination of leverage, and prohibition of fund pools are the focus of regulation under the new regulatory regime of extensive asset management business, and that asset management products are required to return to their essence, i.e. “wealth management with entrustment on behalf of the trustor”. So then, how does the trust sector return to its essence, and what path must it take?

Wu Yang is a partner at Merits & Tree Law Offices