One of the first things observers of China’s trusts notice is that the firms bear little or no resemblance to the entities called called trusts outside of the country.
"Just because it’s called a trust, doesn’t mean it is a trust," said Simon Gleave, a partner at KPMG in Beijing. "Never imagine it has anything to do with what you expect from trusts back home."
Unless, that is, your home is Taiwan or Japan.
Taiwan first established trust and investment companies in the 1971 for much the same reason as the mainland: There was a need to create structures that could provide long-term financing for property and infrastructure projects that wasn’t easily met by banks. Trust firms grew quickly through the 1970s and 1980s as the island’s economy developed, but there were regulatory hurdles.
Until 1999, trust companies could only take deposits from the public to do financing projects and were unable to participate in foreign exchange, a serious shortcoming in an economy as export-reliant as Taiwan’s. "If you couldn’t do foreign exchange, you lost a lot of business," said Lee Tsun-Siou, a professor of finance at National Taiwan University’s College of Management.
These restrictions combined with the island’s growing economy – a developed economy has less need for the kind of non-bank long-term financing offered by these trusts – to push them out of favor. Then, in 1992, Taipei made it easier to establish commercial banks. Many trust firms jumped at the possibility to convert themselves into banks, which allowed them to increase their business scope and participate in previously forbidden areas. The effect has been dramatic. "Trust companies in Taiwan are vanishing," said Lee.
He was not exaggerating: By the end of 2007, Taiwan counted just one trust.
Those that chose the commercial banking route have done well. Chinatrust Commercial Bank – which in 1971 became Taiwan’s first trust under the name Chinatrust Investment – is now of the island’s largest private banks.
In Japan, the establishment of vehicles for long-term financing began much earlier – in 1902 with the founding of Industrial Bank of Japan (IBJ), which acted as a trustee in railway and other projects, said Keisuke Otsu, a professor of economics at the University of Kent.
Subsequent regulatory changes permitted the bank to participate in securities underwriting services and offer equities, and it was used as the main source of government funding for industries like steel and shipping during World War II.
"After the war, these industries lost competitiveness and the purpose of the bank became obscure," Otsu said in an email. IBJ was privatized and became a long-term trust bank in 1952.
In the 1960s, IBJ provided long-term financing for heavy industry, but slowing growth forced it to realign its services. In 2000, it combined with Fuji Bank and Dai-Ichi Kangyo Bank to form Mizuho Holdings, now a subsidiary of Mizuho Financial Group (MFG.NYSE, 8411.TYO)
The similarities of the original functions of China’s trust companies with their cousins in Taiwan and Japan might appear to point to a likely development path for trust firms on the mainland. Indeed, some see this as the inevitable result of financial liberalization blurring the line between banks and trusts in China. Others are less sure.
"I think the development so far is different. The nature of the business is quite different," said Lee.
Jason Bedford, Gleave’s colleague and financial services manager at KPMG in Beijing, agrees. "Japan and Taiwan [are] really the only countries with similar entities. But just because they’re similar, it doesn’t mean they’re the same."
The history of China’s trust companies, established in a Communist system as local and municipal government-owned financing vehicles, informs some of the difference. But it’s function, not history, that sets them apart most.
"The key difference … is that Japan and Taiwan had no problems with financial innovation in the banking sector. China doesn’t want [innovation] in the banking sector," said Gleave.
While Japan and Taiwan may provide interesting examples for comparison, China’s trust companies will have to find their own path.