The China Banking and Insurance Regulatory Commission has launched nation-wide on-site spot inspections of financial institutions including trust companies, as part of its ongoing crackdown on the Chinese shadow banking sector and conduit operations in particular.
According to ThePaper.cn the latest crackdown is focusing in particular upon shadow banking and cross-sector finance operations, and has already prompted a number of Chinese trust companies, including CITIC Trust, to suspend their “conduit operations” (通道业务).
A recent report from Moody’s said that conduit operations are a key form of Chinese shadow banking, with CBIRC head Guo Shuqing stating in March of this year that shadow banking and conduit business would be key focal points for upcoming regulatory efforts.
The now-defunct China Banking Regulatory Commission (CBRC) signalled at the end of 2017 that it would step up both off-site regulation and on-site inspections of bank-trust operations, following a recent spate of rapid, high-risk growth.
The “Notice Concerning Standardisation of Bank-Trust Operations” (关于规范银信类业务的通知) stipulated that trust companies would not be permuted to directly or indirectly provide guarantees as entrusted by entrusting banks, execute “drawer agreements” with entrusting banks, or provide conduit services on behalf of entrusting banks in order to dodge regulatory requirements.
In China bank-trust conduit operations (银信通道业务) generally refers to banks packaging together loans and offloading them to trust companies, in order to free up capital by shifting them off balance sheets.
The trust company serves as a special-purpose vehicle, and only collects a “conduit fee,” without bearing any risk or reaping any returns from the assets.
In addition to enabling banks to expand the volume of loans they issue, they also enable banks to extend credit to certain restricted sectors such as real estate.
One source said to The Paper that Chinese regulators had markedly stepped up their inspections of trust companies following the release of the Notice, dispatching inspection personnel to spend longer periods of time on site.
“This year no one is earning much money,” said the source.
The majority of trust companies have yet to suspend their conduit operations thus far, however, because the Notice only requires that supplementary capital increases and provisions be made based on the nature of specific operations.
Trust companies are not permitted to exceed stipulated business volumes, which has prevented them from increasing the scope of operations, and instead seen them significantly raise their conduit charges.
Data from the China Trustee Association indicates that as of the end of 2017 the trust sector had 26.25 trillion yuan of assets under management, of which 70% involved conduit operations, which emerged as a key driver of rapid growth in the sector in the second half of 2016.
Restrictions on conduit operations are expected to significantly reduce the assets scope of the trust sector, and heavily impact those trust companies that are dependent upon conduit business.