The PRC's First Trust Law: Trusts Without Chinese Characteristics?

The PRC has recently promulgated its first law governing trusts. This law has created a legal basis for both government and private actors to create and use trusts. We sketch the context of this new law and highlight some of its key provisions.

On April 28 2001, the Standing Committee of the National People's Congress adopted the PRC Trust Law  (中华人民共和国信托法) (xin tuo fa). This is the first law concerning trusts that has been promulgated in the People's Republic of China (PRC). It comes into force on October 1 2001. The PRC Trust Law  (中华人民共和国信托法) (Trust Law) will apply to all civil, business and public interest (gong yi) trust activity conducted inside the PRC. Official PRC media describe the Trust Law as a "foundation" for the forthcoming investment funds law and acknowledge that it fills a gap in China's legal structure.1 They also stress its utility in "normalizing" trust activity, which is described as "chaotic."2

The provisions of the Trust Law are basic, but by sanctioning trust activity and regulating fundamental matters such as the establishment, management, modification and termination of trusts, the Trust Law may have a salutary impact. The Trust Law provides a platform for further development of the private sector in China and reflects the extent to which private wealth has already become important. It may also be useful in the further reform of State-owned enterprises (SOEs) if policy changes allow the control of State shares (and therefore majority ownership) in large enterprises to be put under private management through trusts.

CATCHING UP

Like many other legislative efforts in China and elsewhere, the Trust Law is an attempt to catch up with, rather than unleash, the type of economic activity it addresses. Trust activity has been prevalent during the era of reform. Although they often seemed to engage in everything but actually managing trusts, banks, non-bank financial institutions, government subdivisions and other organizations have enthusiastically formed trust and investment companies. The China International Trust and Investment Company was formed in 1979. PRC banks formed trust departments in the early 1980s and then converted them into nominally independent trust investment companies during the "company craze" after 1984.3 Provincial and local governments and government agencies also formed trust companies as investment windows. By 1988 China had more than 1,000 trust companies of various forms.4