China Trust Sector 2011

China’s Trust industry is often viewed as the black box of the Mainland’s financial services sector. Money goes in and a host of new products go out. In this sense, trust companies have been (not inaccurately) viewed as product packagers for other institutions. Regulators are dead set on forcing the trust industry to evolve, and this means taking a larger share of China’s asset management market. Given the need for capital injections, now is a ripe to invest in the trust industry, for firms that had been considering a more substantial move in establishing a larger presence in China.

• Total trust industry AUM has grown extremely quickly in the past five years. The figure now stands at an estimated RMB3.74tr, above that of the mutual fund industry. Only a small amount of this is made up by asset management, meaning that trust companies’ current capacity to provide investment management is much weaker than that of FMCs.
• Regulators are intent on forcing trust companies to transform their business lines, away from being product packagers for other institutions and having competitive advantages of their own in the asset management space. In the short-term this will severely curtail AUM growth but in the long-term, a significant number of new opportunities will be available.
• Trust companies have two major strengths: flexibility in product manufacturing and a wide variety of possible investment targets. Their brand position is relatively weak at present making sales a more difficult prospect, focusing on these two advantages will allow trust companies to gain control of more of the market for asset management.
• A shortage of registered capital as the result of new regulations means that many trust firms are running short on registered capital, creating an opportunity for interested foreign firms to buy in. While restrictions remain, the trust platform, given its flexibility, is an extremely valuable part of an overall China strategy for any financial service provider.

We hope that this report will serve as a starting point for discussing industry trends and firm level problems from which we hope our clients can learn.

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