Li Jinnan a Partner at? King & Wood’s Banking Group has published an article on the CBRC’s new circular (the “Circular”) to allow bank-trust cooperation to resume in certain conditions after closing down repackaged trust products earlier in the year.
Full article at: http://www.chinalawinsight.com/2010/09/articles/finance/new-circular-to-change-business-model-of-banktrust-cooperation/index.html
As a source of steady income, trust companies had been taking loans off the books of banks and repackaging them up as trust products. The China Banking Regulatory Commission (“CBRC”) became alarmed when the volumes grew too big and in early July, leading the CBRC to abruptly close down the entire business by ordering trusts to halt all cooperation with banks. Recently, the CBRC has issued a new circular (the “Circular”) to allow bank-trust cooperation to resume in certain conditions.
We believe the Circular will bring about changes to the current business model of bank-trust cooperation.The Circular boasts several points worth noting:
1. The Circular focuses on the bank-trust wealth management business whereby commercial banks on one hand collect funds from clients through issuing wealth management products and on the other, entrust such funds to trust companies for management (“Model A”). The banks’ clients have no direct dealing with the trust companies in Model A. Trust products engaging a bank only as a distributor to promote the products (“Model B”) are not targeted in this Circular.
2. Model A is further categorized into a “financing category” and an “investment category”. A trust company’s outstanding balance in the financing category shall be kept at 30% or less of the total wealth management fund under Model A. In principle, the investment category is also barred from private equity investment (with possible flexibility in emerging industries such as new energy remaining to be seen).
3. The direct impact of the Circular is the volume of bank-trust products used as bank loans or debt-like investment (including typical equity investment attached with a put option) will have to be reduced to below 30%. This means banks and trust companies will have to maximize their profits through the remaining 70% investment category products. However, with the explicit ban in the Circular on private equity investment which trust companies have an edge over other peers, there does not seem to be much room for the profit maximizing:
Due to the lack of expertise and various restrictions on trust companies participating in the secondary securities market, it is unlikely that the majority of funds in the investment category will be channeled into the secondary securities market; and
Trust companies may turn to participate in the national interbank bond market to invest in fixed income products, thus increasing the whole asset base.This would definitely reduce the total return profile and may in turn affect the distribution of wealth management products.
