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Chinese authority is ramping up the crackdown on the country’s more than 21 trillion yuan trust sector, after violations were found in several major trust companies.
The China Banking and Insurance Regulatory Commission (CBIRC) recently issued a document to trust companies requiring them to step up efforts to rein in trust financing business, people from several trust companies said.
The regulator told them to cut the size of their trust financing products, they said. Trust financing involves providing loans to businesses that are packaged into trust products and sold to investors.
They are required to cut the size of the business by no less than 20 per cent from that in 2019, one person said.
The authority has been stepping up scrutiny on the trust industry since the end of 2017, requiring that business of the sector should only decrease.
In the end of 2019, the regulator stressed that risks in trust financing business remained high despite tightening regulation and pledged to take measures to control the growth.
In March this year, the regulator told trust companies through “window guidance”, or verbal instructions, to cut the size of the business, although it didn’t mention any specific targets at the time.
The latest order to reduce business came after the total risky assets of the sector surged. According to data from China Trustee Association, by the end of March this year, trust sector’s risky assets amounted to 643.1 billion yuan, up 11.45 per cent from the end of 2019 and surging 127.2 per cent from the same period last year.
The move came after scandals emerged in several major trust companies . Earlier this week, troubled Sichuan Trust Co. Ltd said they may not have enough funds to repay investors on time. A regulator said investigators had found evidence of embezzlement by the company’s shareholders.
In addition, the regulator found misappropriation of investments in trust products sold by Anxin Trust Co. Ltd.Â
The latest guidance for trust companies was issued as the CBIRC is preparing regulations to put the trust industry under closer oversight. The draft rules, which were put out for public comment in May, will govern how trust companies manage client funds, clarify requirements on trust products and toughen rules on their loan-related investments.
The new draft rules will cap trust companies’ total investments in so-called nonstandard credit assets – assets such as loans which cannot be easily valued or sold – at 50 per cent of the total funds they raise from investors. Trust companies can invest no more than 30 per cent of their net assets in nonstandard credit assets backed by the same company and affiliates, according to the draft rules.
According to the regulator’s data, as of the end of May this year, the total assets of China’s trust sector stood at 21.26 trillion yuan, 342.6 trillion yuan less than that in the beginning of the year and 4.98 trillion yuan lower than the peak in 2017.
China has 68 authorized trust companies and last year regulators punished nearly one-third of them for violations including conducting illicit off-balance-sheet lending and illegal real estate investments, levying 22.5 million yuan in fines.