Banks place faith in China’s trust companies

Wester banks prefer China trusts due to its loose regulation... While Wall Street titans have long since acquired expensive stakes in China’s top-tier lenders, a growing number of western banks are choosing a more low-key approach to access the mainland’s growing financial services sector. In recent months Australia’s Macquarie Bank, National Australia Bank, Barclays and Royal Bank of Scotland have struck deals – some of which await government approval – to take minority stakes in China’s small trust and investment companies for undisclosed sums. Several other foreign investors are in various stages of talks to buy into the 60 or so remaining trust firms, although domestic lenders are also circling. The trust companies were formed in the free-wheeling 1990s, though many were forced into bankruptcy during the last bear market that hit China around the turn of the millennium. But their balance sheets have been tidied up and their local government owners hope western expertise will help to drive profitability. One executive of a western bank seeking to buy a stake in a Chinese trust company says: “The debts of most trust companies have been wiped clean and buying into one, for perhaps just tens of millions of dollars, is a relatively cheap and unfussy way of accessing the growing market for banking products.” Recent deals ● Barclays agreed to buy 20 per cent of Chongqing-based Xinhua Trust ● National Australia Bank bought 20 per cent in Lianhua Trust● Ashmore Investment took 20 per cent in Beijing International Trust and Investment Company● Morgan Stanley seeking to acquire 20 per cent of Hangzhou Industrial and Commercial Trust● Macquarie hopes to buy 20 per cent in Kunming Trust● Royal Bank of Scotland in discussions with Suzhou Trust for 20 per cent stake For those such as Royal Bank of Scotland, buying a stake in a trust helps to broaden its mainland platform – which in its own case includes an investment and joint venture tie-up with Bank of China, the nation’s second largest lender. Under Chinese rules, trust firms face fewer regulatory obstacles than most other financial institutions in making equity investments in a wide range of sectors, including insurance, securities broking, asset management and private equity. Trust companies are also allowed to offer a variety of corporate banking services, including asset management and indirect fundraising for domestic enterprises. In the 1990s trust companies were allowed to trade bonds and to invest in real estate, but after a number of bankruptcies and fraud scandals the government cracked down, hastening the demise of many of them. According to China’s banking regulator, which oversees the sector, “trust companies played a vital role in facilitating the establishment of China’s securities markets” but “a heavy price was also paid during the process”. Total banking sector deposits in China by the end of last year were Rmb40,105bn ($5,850bn), compared with total trust deposits of Rmb320bn. However, according to recent local reports, trust deposits are growing strongly. The regulator has further tightened the rules in recent years, but trust companies retain a flexibility that allows them to offer a range of services to wealthy individual or institutional customers. “The trust companies that are left now operate a bit like hedge funds do in the west but on a domestic level,” according to Isaac Meng, an analyst at BNP Paribas in Beijing. “Buying into one of these firms would give an international bank the chance to provide relatively unregulated wealth management services.” It could also allow them to explore one of the hottest new fads in the Chinese financial world, domestically raised private equity funds. Foreign investors in trusts endure the same restrictions imposed on overseas investors in Chinese banks, with single investors allowed to take up to 20 per cent and combined foreign investment kept below 25 per cent – though there are hopes the limits could soon be raised.