March 21, 2012, 12:15 AM
Article from The Wall Street Journal
By Isabella Steger
Property developers in China have been heavily reliant on trust companies for funding
Amid a string of recent sell-downs by Western banks of their stakes Chinese lenders, another sector in China’s finance industry could be seeing renewed interest: trust companies.
As the WSJ reports Wednesday, J.P. Morgan Chase & Co. will buy a 19.9% stake in China’s Bridge Trust Co., based in Zhengzhou, Henan province. It comes shortly after Bank of Montreal said it would take a 19.99% stake in Cofco Trust, a unit of China’s state-owned agricultural trading house, Cofco Group.
These investments also take place against a backdrop of Wall Street banks cutting their holdings in Chinese lenders, signaling continuing worries over the outlook for the sector. Goldman Sachs has been steadily paring its stake in Industrial & Commercial Bank of China, for example, while Bank of America Merrill Lynch cut half its stake in China Construction Bank last year. Citigroup Inc. sold its stake in Shanghai Pudong Development Bank this week.
The recent interest in these vehicles could indicate that Western banks are taking a new look at trust companies, as investments in large Chinese lenders seem too volatile – Goldman made a loss in Asia last year due to the plunging value of its ICBC stake – while their securities joint ventures in China struggle to be highly profitable.
Trust companies appear to offer a better alternative. These lightly regulated vehicles occupy a special place in the country’s financial sector. They don’t take on the risk of an investment, but channel funds from companies and rich individuals to other investments including private equity, loans, bonds, stocks and stakes in property development, connecting Western banks with China’s wealthy population and huge savings pool. There are more than 60 trust companies in the country.
They have been instrumental in making up the shortfall in lending to property developers as conventional banks pulled back their exposure to the sector last year, particularly during the second quarter. But in a bid to cool credit growth and curtail “shadow financing,” Chinese regulators also started clamping down on that loophole in the middle of 2011 by requiring that any trust financing for a property project must be vetted by the China Banking Regulatory Commission. As a result, trust financing to developers plunged by year-end. Earlier this year, China also banned trust firms from selling commercial-paper backed products.
Despite the crackdown, interest in trust companies continues to balloon. Tired of putting their money in underperforming stocks and mutual funds, Chinese investors have been piling into trusts, with total trust assets under management up 58.25% at the end of 2011 to 1.67 trillion yuan.
There was a wave of Western interest in trust companies a few years ago. The first foreign lender to enter the trust market was National Australia Bank Ltd. in 2008. In 2009, Macquarie Group Ltd. formed trust company joint venture with two state-backed companies, Sino-Australian International Trust Co. Morgan Stanley also invested in Hangzhou Industrial & Commercial Trust Co. in the same year. Barclays Bank and Royal Bank of Scotland PLC also have investments in the sector.
Japan’s Sumitomo Trust & Banking Co. has also said earlier this year it hopes to invest more in China’s trust industry by offering financial services and products to local companies and wealthy individuals. It already has an investment dating back to 2010 in Nanjing Trust Investment Company.
Article from The Wall Street Journal
