China to curb shadow banking with draft rules for trust firms

CHINA’S banking and insurance regulator on Friday (Dec 30) issued draft rules to step up oversight of the US$3 trillion trust industry, and reduce financial risks in the shadow banking sector.

The China Banking and Insurance Regulatory Commission (CBIRC) said that trust companies should divide their businesses into three categories: asset management, asset servicing and charitable trusts. This will help align them with international standards and encourage them to return to their original businesses.

The once-freewheeling trust industry is at the heart of a vast shadow banking sector, where financial activities take place in unregulated conditions. For years, the trust industry helped channel funds into companies that struggled to obtain bank credit through opaque structures. Authorities have since stepped up their supervision of the industry, pushing trust businesses towards greater transparency.

The CBIRC said that trust companies should no longer provide “channelling” services to sidestep regulatory requirements, nor use non-standard capital pools in any form.

Trust firms have provided “channels” for individuals, companies and banks to invest money in high-yield but risky products. Such businesses have been targets in Beijing’s crackdown on shadow banking, as opaque product structures made it hard for regulators to track risks.

The CBIRC gave trust companies a grace period of three years to comply with the new rules.

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In October, some trust firms received notices from regulators to report their operations based on the proposed new classification rules. REUTERS