The Chinese trust industry is unique by international comparison. Globally, trust is a legal form used in financial solutions for risk isolation and tax optimization purposes. For example, it is widely used for cross-generational wealth transfer and by philanthropic foundations. In China, however, it refers to a particular type of financial services license enabling it to engage in a number of quite distinct areas of financial services.
Trust companies in China today are primarily engaged in two businesses.
- Private placement investment banking – providing financing to relatively higher risk borrowers, funded by high-net-worth individuals (HNWIs) and corporations/institutions (investors)
- Conduit business – providing a conduit to banks and other financial institutions that are restricted from investing into certain asset classes or launching certain wealth management products. Trust is the only financial license that can invest in asset classes spanning across money market, capital markets and unlisted assets (such as loans, unlisted shares, etc.)
The trust industry has seen strong growth in AuM over the last 5 years. It had collected RMB7.5 trillion AuM by the end of 2012 (Exhibit 1), and this number rose to RMB10 trillion by Q3 2013 – more than the insurance and the mutual fund sectors. This rapid increase was due to the inability of the Chinese banking and capital market systems to provide sufficient financing for the fast growing and cash-hungry sectors like real estate and SMEs. Trusts were able to fill this gap in the financial system by bridging this financing need with the investment need in particular of the rapidly growing segment of wealthy investors looking for higher returns. The rise of HNWIs, (defined as individuals with personal investable assets worth over USD1 million or RMB6 million) looking for alternative investment opportunities to low interest rate deposits and long under-performing equities, have been key to generating funding for the industry.
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