China is likely to ease the limits on overseas investment in local trust companies by allowing foreign firms to hold a 49 percent, or even higher, stake in them.

 

Financial regulators are considering lifting the 25-percent ceiling on the stake that foreign institutions are allowed to hold in local trust companies, an official close to the State Council said yesterday on condition of anonymity.

 

"If approved by the government, foreign companies may be able to hold a 49 percent stake in a trust company. Some large foreign companies, with approval from financial regulators, might also control a trust firm with more than a 49-percent stake," he said.

 

According to the official, foreign financial institutions and large private equity firms such as Blackstone Group and Carlyle Group will be allowed such investments, but non-financial enterprises might be barred from taking a stake in local trust firms.

 

The purpose of allowing foreign investment in the trust industry, a comparatively quicker step than opening up commercial banks, is to attract foreign strategic investors to help restructure trust firms into professional wealth management institutions, according to the source.

 

By September 2006, China had 54 trust firms, managing a combined asset of 317.8 billion yuan - a small part of the total assets of the financial industry.

 

But unlike trust firms in developed countries that help the rich to manage their wealth or act as a collective investment vehicle, Chinese trust firms focus on money lending, supplementing commercial banks.

 

"A real trust firm helps to manage household wealth or certain non-profitable funds. But local trust firms are in fact dealing with 'non-trust' business," said Zhao Xiyun, a professor with Renmin University of China. "The country's trust industry is still in the early stage of development, and lacks a clear business model."

 

Zhao said that though the Trust Law enacted in October 2001 gave a clearer definition of the term "trust", the industry calls for more regulations.

 

Many trust firms such as Jinxin Trust & Investment Co Ltd and Jilin Pan Asia Trust & Investment Co Ltd have been stuck in credit crises because of illegal trading and lack of risk management. In March 2006, Jinxin Trust was found guilty of illegally amassing savings and fined 10 million yuan.

 

To help restructure trust firms into professional wealth management institutions, the government may also allow commercial banks to take a controlling stake in trust firms.

 

Bank of Communications is likely to take a controlling stake in Hubei International Trust & Investment Co Ltd, an unnamed source from the bank said. The deal is yet to get official approval.

 

"Commercial banks owning trust firms is common in developed countries," Zhao said, "as more and more commercial banks are developing into financial holding companies."

 

The China Banking Regulatory Commission launched two rules in February and April to guide trust firms in developing new businesses. According to these rules, trust firms may engage in pension fund management, wealth management in overseas investment, private equity investment, asset securitization and financial leasing, apart from their primary lending business.

 

The rules require trust firms to have a registered capital of at least 1 billion yuan in dealing with wealth management in overseas investment.

 

"The rules have better outlined the status of trust firms and stipulated areas we are allowed to enter," an industry insider from Yunnan International Trust & Investment Co Ltd said, adding this would lead to a restructuring of the trust industry. "Some poor performers may be kicked out of the business as a result."

 

(China Daily May 9, 2007)