There is no question that Beijing is concerned about the effects of banks’ cooperation with China’s trust companies. In addition to hindering the product development and management expertise of trust companies through over-reliance on banks for generating business, it introduced real and uncertain liquidity risks for banks.
When the China Banking Regulatory Commission (CBRC) set about restructuring the trust sector in 2007, this was not what it hand in mind.
Ivan She, a senior analyst at Z-Ben Advisors in Shanghai, said that the government was generally pleased with the success of restructuring as far as containing risk and improving risk management among trusts. "But in terms of growth and the business model of the trust industry, the government is not happy," he said.
At the same time, the regulation that the CBRC introduced this year to force banks to bring off-balance-sheet loans back onto their books contained little in the way of rules for bank-trust cooperation beyond 2011. A similar lack of clarity is not uncommon in other regulation surrounding trust firms – even in deciding which regulator is in charge. Given the risks to the financial system, why would Beijing leave room for interpretation?
A financial industry insider who spoke on condition of anonymity said a prime culprit is what in the US would be termed pork-barrel politics. Special interests representing local governments and companies have considerable pull in Beijing, and these benefit from ease of access to financing.
"For these people, a lot of fuzziness is good. They say, ‘Maybe I get greased along the way’," he said.
Regulatory fuzziness has more above-board beneficiaries as well. Wang Hao, a partner at Beijing-based law firm RayYin, said some asset management companies have benefited from a rule promulgated by the China Insurance Regulatory Commission (CIRC) allowing them to play a role as trustees in asset management for insurance companies. Technically, only CBRC-licensed trust companies can call themselves trustees, but the practice continues.
"Still, the CIRC rule is there, and still the insurance asset management companies are doing it. So I don’t think this will be changed until the three financial regulators merge into one," she said.
Even in the absence of regulatory confusion, however, the power of the central government has its limits. The CBRC came down sharply on the bank-trust practice to send a clear message to a populace that tends to underestimate financial risk, said the insider. But at the end of the day, it can only do so much.
"It’s a developing economy. People don’t follow the rules, and the CBRC knows this," he said.