Shadow Banking Crackdown Turns the Spotlight on $3tn Trust Company Sector

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China’s financial regulators are now directing their attention towards trust companies as part of efforts to crackdown on the country’s burgeoning shadow banking sector.

Trust companies are one of the largest and most rapidly expanding segments of China’s shadow banking industry, estimated to be at least 20 trillion yuan (approx. USD$3 trillion) in size, or around a tenth the scale of the commercial banking sector.

Figures from the Chinese central bank indicate that trust loans increased by 1.31 trillion yuan during the first half of 2017, as compared to 279.2 billion yuan during the same period last year.

The vehicles have emerged as a highly popular means for channelling funds into those areas of the economy where the central government has restricted investment due to risk concerns, such as the coal, property and steel sectors.

While the companies fall within the purview of the China Banking Regulatory Commission, they are not held to the same stringent standards as conventional lenders, lacking the commensurate capital adequacy requirements for example.

After targeting wealth management products and interbank certificates of deposit, Chinese regulators are now turning the spotlight onto trust companies as part of ongoing efforts to curb shadow banking activity and stymie systemic financial risk.

In April authorities signalled tighter regulation of trust companies with the launch of new restrictions on money pooling schemes as well as product structures that permitted the dodging of leverage restrictions.

This year trust companies will also be required to identify the end borrower of funds during the registration of product details.

One recent case involving a trust company highlights the determination of regulators to bring the sector to heel.

Reuters reports that a government notice dating from January indicates authorities issued Shanghai International Trust with a 200,000 yuan fine for selling a product that breached leverage restrictions.

Shanghai Trust is one of the largest players in the sector, with 3.89 billion yuan in revenue as of the end of last year.

The regulations it breached reportedly restrict the borrowings of real estate developers to three times their existing net assets.

Sources close to the matter said to Reuters that Shanghai Trust served as a conduit by which China Construction Bank lent an unspecified amount to Cinda Asset Management Company for investment purposes.

Cinda is believed to have used the loan for a land acquisition, an area where investments are heavily scrutinised by regulators due to risk concerns.

While the fine is trivial sum for Shanghai Trust, sources said that regulators had dealt a heavy blow to the company by placing a three-year ban on sales of its products to the insurance sector – one of the trust’s most lucrative sources of funds.

 

While authorities may possess the political will to crack down on trusts, successfully reining in the sector could still prove challenging for a number of reasons.

A key challenge is the sheer complexity of trust structures, given that they are designed to dodge regulatory restrictions and obscure the recipients and beneficiaries of lending.

Another major challenge could be rising demand for trust loans, even amongst state-owned enterprises who would have previously avoided them, as the crackdown by China’s financial regulators creates a tighter monetary environment.

This problem could be further exacerbated by a shortage of personnel at CBRC, which is already struggling with the heavier workload generated by the government’s crackdown on the financial sector.

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