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Banking sector to get slice of trust pie
By Sun Min (China Daily)
Updated: 2004-07-27 08:32
China's commercial banks are going to be allowed to buy into trust and
investment firms, a breakthrough in the segregated regulatory scheme in the
banking, securities and insurance sectors of the financial industry.
The China Banking Regulatory Commission (CBRC), the watchdog of banks and
trust firms, is expected to issue a regulation on the implementation of
administrative permission concerning trust and investment firms. This would make
qualified commercial banks potential shareholders in the trust and investment
companies.
The banks would have to meet criteria in capital adequacy, creditability and
profitability. The overall outward investment of the banks could not exceed 20
per cent, according to a report in the Economic Observer newspaper yesterday.
Securities, insurance, financial and leasing firms can also invest in trust
firms if they meet the same standards.
Such cross-industry investment is still not allowed for Chinese banks. This
is because existing regulations do not allow them to invest in other financial
arms, including insurance, securities and trust businesses, because of the
segregated regulatory system of the financial industry.
But it has become a new trend to gradually alter the regulations to allow
different types of financial firms to invest in each other, experts said.
Xia Bin, director of the Financial Institute of the Development and Research
Centre of the State Council, predicted the authorities would have to gradually
loosen controls as the market environment is changing.
But the experiment should be carried out with efficient regulation of the
banks, who must also be prudent.
The new rule for trust firms would also set thresholds for foreign financial
institutions, including commercial banks, to buy into domestic trust firms.
These would be along the lines of a minimum US$1 billion of total assets and 8
per cent of capital adequacy, with sound credit rating and good internal control
mechanisms.
The maximum ratio of stakes a single foreign financial institution could hold
in a domestic trust firm would be capped at 20 per cent.
A draft of the new rule has already been sent out to experts and companies by
the CBRC to ascertain public opinion, an official with a trust company in
Shanghai told China Daily yesterday.
Several other regulations regarding the trust business are also expected to
be issued, covering information disclosure and affiliated trade, he said.
The trust companies would have to improve transparency and provide
information disclosure accordingly, which would enable investors to get a
clearer picture of the structure and performance of the companies.
"For investors, it is still hard to trace the shareholding structure of the
trust firms and some irregularities may emerge due to the low transparency," the
official said.
Information disclosure is more important if financial institutions are
allowed to invest in trusts and investment firms.
China's trust industry started to boom last year after a restructuring of the
industry since the mid 1990s, when a slew of default payment scandals and
irregularities forced the authorities to close down many trust firms, leaving
only 59 in business today.
The ban on banks investing in the industry was also a result of the market
rectification.
Even today, risk concern still weighs heavily on the mind of regulators,
though step-by-step innovation is encouraged.
Moreover, as the trust companies speed up the issue of new trust products,
the need for legislation also becomes more crucial.
So far, laws and regulations for the trust industry are still insufficient,
said an official with a Shanghai trust firm.
Alarm bells have already been ringing for investors and regulators because of
a default in repayment of a trust product by Jinsin Trust and Investment Co
occurred early this month.
Though it was regarded as a special case, it has reminded many of the
importance of investor education, risk management and information
disclosure.
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