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Leading experts and senior officials are calling for improvements to the legal and market environment for China's blooming trust industry, which has recovered from a major reshuffle.
Jiang Ping, a renowned law expert and lifelong professor of the China University of Political Science and Law, said such work required "urgent attention" since the industry is still facing lots of difficulties.
Jiang made his remarks earlier this month at China's first Trust International Symposium which looked at ways to improve support systems and speeding up the development of China's trust industry.
China still needs laws for the trust industry as it lacks supporting law on tax, accounting and business registrations. Moreover, China should make efforts to improve the overall credit system as trust itself was based on credit.
Compared with developed countries, China's trust industry was still in its infancy, with trust products only focusing on business trust but not yet civil and welfare trusts.
Currently, China has 59 trust companies after a fifth overhaul two years ago.
The total volume of trust assets tops 200 billion yuan (US$24 billion), but is still far behind Japan's 37 trillion yuan (US$4.46 trillion).
The mainstay is the capital trust, accounting for 84 percent, according to Gao Chuanjie, the director General of Non-Bank Financial Institution Supervision Department of China Banking Regulatory Commission (CBRC).
Xia Bin, dean of the Institute of Financial Research of the Economic Research Centre of the State Council, has raised queries with the CBRC and China Securities Regulatory Commission, arguing that ways used to regulate banks should not be used to supervise trust companies.
Banks gain profits mainly from the gap between deposit and loan interest rates. For trust companies, capital management is their fundamental business and that depends mainly on service charges.
Therefore, supervision on banks centres on capital adequacy rate but supervision on trust companies focuses on the establishment and implementation of trust contracts.
In these cases, Xia proposed some points for further discussion: Should capital adequacy rate be adopted to regulate trust companies? Should the starting point for a trust contract be 50,000 yuan (US$6,024) and the number of contracts of each single trust product be limited to 200? Should trust companies be prohibited from setting up branches and managing businesses in other provinces and cities? Is it reasonable to collect supervision fees on trust companies just as those on banks?
For Xia, most of the answers are negative, and his viewpoint is welcomed by presidents of trust companies.
"The government should differentiate supervision measures on trust companies and banks as they differ to a large extent," said Zhu Yaobin, deputy General Manager of Hongtai Trust & Investment Co Ltd.
Wang Lianzhou, head of the Drafting Group of Trust Law, also said the industry was problem-laden.
From the perspective of strategic decision makers, lack of a clear guideline for the trust industry and supporting legal systems on tax and supervisions are blocking the development of the industry.
From the management perspective, unsound internal risk controlling mechanisms and corporate governance may result in illegal management, thus damaging investors' interest.
In fact, two trust firms, Kinghing Trust & Investment Co Ltd and Tinhtic Trust & Investment Co Ltd were found to have embezzled huge amounts of trust capital.
Such cases rang warning bells, but they never presented the overall performance of the whole industry, Xia said.
Moreover, the compartmentalization of management in the financial sector, including the splitting of fund and securities sectors, greatly dented the competitive edge of trust companies.
And lack of fund-raising and promotion channels of trust companies further throttled the recovery of the trust industry.
According to regulations, trust companies are not allowed to float bonds or advertise themselves through newspapers, television, radios and other public media.
However, experts agreed that China's trust industry is still playing an irreplaceable role in the financial world.
Among many financial tools, trust is the only one that boasts the functions of both financing and investing.
"Trust companies shall endeavor to expand existing products," said Jiang. "Pension fund and real estate financing will be future star trust products, and enjoy a huge potential market."
Jiang's view has been borne out by Japanese practice. Hidehiko Naito, deputy president of Japan's Mizuho Trust & Banking Co Ltd said that pension funds have been a key business in Japan's trust industry.
Most officials and scholars are optimistic about the future of China's trust industry. Gao and Wang both wrote out their prescription for the industry.
First, perfect trust law and speed up the construction of supporting systems. Presently, drafting of accounting regulations for trust business has been finished and will be released soon.
Second, strengthen and unify supervision policy.
Third, improve the credit system as that is the premise and basis for the trust industry.
Fourth, preparations for an association of the trust industry is under way and is expected to be founded by the end of this year.
(China Daily October 25, 2004)
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