Trust companies have been taking on much of the local debts haunting China’s economy. And most of their debts come from domestic investors in China, who bear most of the risk, when things go wrong, writes financial expert Sara Hsu in this weblog.
The China Banking Regulatory Commission, which took over the regulatory role for the TICs in 2003, established many guidelines for their operation. A serious investigation into the TICs was launched in 2004, and a number of scandals were uncovered; by 2005, the number of TICs had unsurprisingly diminished.
The reincarnation of TICs as trust companies is a result of a 2007 regulation that improved corporate governance and restricted the use of trust companies’ own assets. With the CBRC as a regulatory body, new regulations, and new names, trust companies became quite appealing to the Chinese public. Between 2008 and 2013, trust industry assets under management increased more than seven-fold. Without quite realizing that these companies have a tendency to encumber excessive risks, taking on loans that banks might be prevented from extending directly, the public has viewed trust products simply as deliverers of yield.
The difference between the TICs and the trusts is that risk among trusts is concentrated among domestic, rather than foreign, holders of trust assets. CBRC officials have been adamant that (domestic) holders of shadow banking products, particularly wealth management products, are the ultimate bearers of risk. In an increasingly market oriented economy, allowing institutions and individuals who take on risks to bear the cost of the risks will likely be more commonplace. And why would the government prop up a flagging industry that has behaved badly in the past, should the economic climate turn sour? The simple truth is that it seems unlikely. The trusts are in danger of joining the TICs in yet another restructuring debacle. This may be the least surprising event in China’s restructuring mix.