China's quickly emerging trust industry was rocked late last month when the country's top banking authority, the China Banking Regulatory Commission (CBRC), ordered commercial banks to inspect the trust products they were selling to customers amid mounting default concerns.
The CBRC's call for tighter scrutiny has naturally taken some of the air out of the trust industry and cast a pall over such products with local investors, many of whom considered trusts to be among the safest bets in a country known for offering few reliable investment opportunities.
As top financial authorities in China ramped up credit restrictions over the past several years, banks in search of off-balance sheet capital have done much to hurry the development of the trust sector, which is now one of the largest segments of China's financial industry. The assets of local trust companies jumped to a whopping 6.58 trillion yuan ($1.04 trillion) by the end of October, compared to 380 billion yuan by the end of 2006, according to Min Luhao, deputy director of the Non-banking Department at the CBRC.
But the winds are turning in China and the trust sector may be in for a long winter as local investors realize the downside risk they are exposing themselves to when they tap these products.
Compared to other areas of the market, the trust sector as a whole remains lightly regulated and many of the vehicles claiming to offer the highest returns are invested in highly volatile industries or businesses wracked by overcapacity. Indeed, shortly before the CBRC's directive, CITIC Trust Co, a trust unit of financial conglomerate CITIC Group, admitted that it had delayed paying interest on trust products which had lent funds to a poorly-performing steel mill.
Also, unlike banks, trust companies aren't required to set aside a portion of their capital to hedge against investment failure. At the same time, unlike securities brokerages or fund companies, trust businesses aren't required to establish rating procedures to evaluate projects picked for investment.
What's more, most trust companies are more interested in creating products that they can collect commission fees on rather than actually delivering the highest returns possible to investors. This will invariably make them less attractive to investors, especially now that regulators have begun allowing insurers and securities brokerages to offer asset management services similar to those offered by trust companies.
In other words, local investors in search of high returns may not have to settle for trust products if the market can provide them with sounder positions. If they want to retain the trust of investors, trust companies had better get serious about controlling risks and pushing up profits.
The author is an economic commentator. [email protected]
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