JPMORGAN AND Fidelity are among the overseas banks and asset managers preparing to apply for trust company licences in China as the sector attracts a new wave of foreign investor interest, according to people familiar with their plans.
Regulators in Beijing, concerned by inflationary pressures, are leaning on the country’s more heavily regulated commercial banks to curtail credit growth. However, trust companies, which do not take deposits, are more lightly regulated.
Many potential foreign investors believe they could be more profitable vehicles since they operate in a murkier realm, where the official banking system meets shadow banking, while offering a wide range of financial services.
There are about 55 such trust companies that can raise money for clients, create investment products that have no ceilings on returns and trade with their own capital. Most are owned either by local governments or state-owned enterprises.
Banks such as JPMorgan, which are keen to build up wealth management businesses in China, find the model especially seductive. In the past few years, a few foreign financial institutions have invested in Chinese trust companies.
Foreign investors are limited to 20 per cent stakes in trust companies, giving them little operational control. HSBC has explored the trust bank concept but has not yet found a potential partner with whom it feels comfortable, according to people familiar with the bank’s China strategy.
Chinese trust companies cater largely to two groups of clients: privately-owned companies that have trouble accessing capital in the traditional banking system and wealthy families in search of higher returns.
Trust companies have abused their freedoms in the past. Guangdong International Trust and Investment Corporation collapsed in the late 1990s, brought down by reckless investments and fraud.
Some bankers fret that the sector is too risky. “ did everything with their own balance sheet,” says a banker. “Now they are supposed to facilitate products for other people. But do they do diligence and do they understand the risks?” – (Financial Times)
