Trust refers to a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Although still relatively new in China, the Chinese trust industry in China has reached new heights in profitability and penetration.
According to the China Trustee Association (CTA), the assets of the trust industry and industrial average profit per capita have increased to 8.73 trillion yuan and 713,000 yuan in the first quarter of 2013. Comparing with AUM of other financial institutions and products, the trust sector has grown significantly in the past year. However, there are still a few obstacles impede the growth trend of trusts in the near future. Source: CTA, Kapronasia Analysis, 2013
Current Challenges
Firstly, a new regulation released on March 2013 by China Banking Regulatory Commission (CBRC) titled ' Notice on Regulating the Commercial Bank Financing Business Investment Operation' (document No. 8) affects both bank and trust industries. The new regulation defines specific rules on approval and controlling risks on non-standardized debt assets and was promulgated due to the upward trend in wealth management fraud in Chinese banks. ‘Non-standardized debt assets’ are types of debt assets which do not trade on the inter-bank and stock markets such as credit assets and trust loans. Banks, as one of the main sales channel for trust product, will need more time to gain approvals for new trust products. Undoubtedly, trust companies can no longer only rely on banks to sell its products in the future.
Moreover, another document titled 'Notice on Suppression of the Illegal Financial of Local Government Behavior' (document No. 463) issued at the end of 2012 by the People's Bank of China, Ministry of Finance, Development and Reform Commission and CBRC has stated rules and restrictions specifically for local government financing with trust companies. These were instituted as there were some cases of local governments leveraging trust products to finance projects through essentially what is a shadow banking / lending system. Based on the data released, the project related to government-trust cooperative products were 63.31% of all projects in 2012. A lot trust companies had to cancel the government-trust cooperative products this year because of the release of this notice.
Despite these challenges, the first quarter data shows a healthy growth in trust AUM and profitability of trust companies themselves although it is unclear whether this trend will be continue.
Finally, the growing asset management industry does not only drive the trust industry growth, but also attracts securities and fund firms come into the market and compete with trust companies. The recent securities regulations encourage securities firms and fund management firms to innovate their business models, which provide a relatively loose regulatory environment compared to the notices recently released for trust industry. The new regulations for other asset management institutions also allow them to provide asset management businesses as trust companies. It drives the market to enter a “Pan-Asset Management” age. In this circumstance, trust companies will face more competitors with stricter rules.
Recommendations
The current figures show positive growth in the trust industry, but the remainder of 2013 may show a slower growth rate because of the changing regulation and competitive environment. Therefore, Chinese trust companies have to be fully prepared and become more aware of the new regulations and competitive environment to continue to grow.
Although other financial institutions are able to provide trust-like businesses, they cannot easily replace the functionality of trust companies. We believe that trust companies should continue to enhance and innovate their business functions and models, to differentiate themselves from other asset management institutions. Trust companies need to strengthen their ability to manage non-standardized debt assets and have better trust asset allocation, which other asset management institutions do not typically have. Moreover, trust companies should also focus on improving their skills around on personal and corporate wealth management, while still keeping social welfare in mind. These advantages and functions are typically not common to other asset management institutions are the key to stand out from the crowd.