China Sets Up Fund to Bail Out Troubled Trust Firms
Fund Provides Safety Net As Risks Grow in China’s Shadow Banking Sector
The creation of the fund was announced by the China Banking Regulatory Commission and the Ministry of Finance on Friday, on the heels of a breakthrough deposit insurance scheme that will soon provide protection for bank deposits.
The regulators didn't say how big the trust fund would be but they said that all trust firms need to contribute, and that rules governing the fund were now in effect.
A new independent company would be formed to collect a fee from trust firms and manage the fund.
“Risks in the trust sector have emerged and they have been rising since the second half of 2013,” said the banking regulator in a separate statement on its website.
The regulator added that slower economic growth coupled with overcapacity problems in several key industries and a property slump have contributed to the rising risk.
China’s trust firms have expanded rapidly in the past few years, by taking money from investors and lending it out at higher interest rates than bank loans. They have become a key source of funding for small, private firms which typically have limited access to bank credit.
China’s trust assets reached 12.95 trillion yuan ($2.1 trillion) at the end of September, up 18.7% compared with the end of last year.
The People’s Bank of China last month announced a plan to insure deposits in the banking system which has long been assumed to have the backing of the state but has no explicit protection. Depositors at the nation’s banks will have insurance coverage for up to 500,000 yuan ($81,000) in a move that the central bank said would cover 99.7% of all depositors.
But regulators have been increasingly wary of the mounting risks from loans in the trust sector and have warned of the potential for bad debt.
Over the past two years, regulators have rolled out a number of regulations curbing business in the trust sector following several high-profile defaults on trust loans.
Under the new rules announced Friday, trust firms need to contribute 1% of their net assets to the fund and the payment will be adjusted annually based on the previous year’s assets. They also need to make additional contributions to the fund after they issue new trust products.
Trust companies can tap into the fund when they have a liquidity shortage, undergo bankruptcy proceedings, or are shut down on order by regulators, the statement said.
“The new rules will limit risks within the trust sector,” said Yin Xingmin, a trust expert and professor at Fudan University in Shanghai.
“It will prevent local governments and state companies from providing a ’cast iron’ guarantee for trust products that are unable to repay investors,” he said.