Plenty of Room to Grow: A Look at China's Business Trust Industry

Until a couple of years ago, China did not have a single, coherent law that could govern one of the key components of a business arrangement: the trust. The PRC Trust Law (中华人民共和国信托法), promulgated and effective on April 28 and October 1 2001, respectively, established the legal status of a business trust in the PRC for the first time.¹ According to a December 29 2001 Circular issued by the General Office of the State Council, a trust business shall be solely conducted by institutions approved by the People's Bank of China (PBOC) or the China Securities Regulatory Commission (CSRC), depending on the case. Due to the then confused state of China's trust industry, the State Council requested all trust and investment companies (TICs) to undergo a thorough reorganization and / or re-registration to develop the trust industry.

The Legal Environment

To encourage development of a healthy trust industry, the PBOC revised the Administration of Trust and Investment Companies Procedures (Trust and Investment Companies Procedures) and promulgated the Administration of the Business of Holding Funds in Trust of Trust and Investment Companies Tentative Procedures (Holding Funds in Trust Tentative Procedures) in May and June 2002, respectively. The former eliminates several restrictions and requirements originally imposed on TICs. For example, TICs can now directly set up investment funds in addition to fund management companies; the creation of new kinds of trust products shall no longer be subject to the approval of and filing with the PBOC; trust funds entrusted to a TIC may exceed 10 times its registered capital; and their compensation reserves, in addition to purchasing national bonds, may be deposited in domestic commercial banks with steady operation and enough financial strength but not limited to state-owned commercial banks, as was originally required. In comparison, the Holding Funds in Trust Tentative Procedures focus on the operation of capital trusts by TICs. Specifically, they provide for investment channels, compulsory content in trust contracts, vesting of trust benefits upon termination, reporting requirements, etc. Since as mentioned above, no PBOC approval is required, TICs are entitled to design and develop new trust products based on market needs, settlors' wills or the practical conditions of the trust property. They thus have more flexibility in their operations. Compared with banks, securities companies or insurance companies, TICs are able to gather and invest funds through much broader channels. To raise the investment threshold and avoid the risks borne by smaller investors, each trust project must have no more than 200 trust contracts with not less than Rmb50,000 entrusted in each. In addition, there still exist several restrictions and prohibitions on the benefits granted: the TICs may not absorb or surreptitiously absorb savings, issue bonds and various receipts, conduct marketing and promotion through advertising, among other things.