This paper examines the phenomenon of investing in Chinese trust fund industry.According to China’s capita wealth status in recent years and more than half are stable upward trend. And a big reason for creating this situation, it is investment and financial management. Effective asset management can help wealth in a more secure was greater appreciation. Trust fund is a fund comprised of a variety of assets intended to provide benefits to an individual or organization. A trust fund can be comprised of cash, stocks, bonds, property and other types of financial products (Investopedia). So trust fund always creates more chances to customers and entrepreneurs. And trust funds are emerging industries in China. Then people are difficult to know risk and profit clearly. These factors would cause much competition, so it is important to identify what we need.
General Speaking, China trust industry is helpful to the economy and they provide loans to companies that banks cannot focus on services from government facility to obtain credit. In fact, the trust industry tends to act as a low-productivity sector lender of last resort, and banks were asked to avoid lending to these industries. China trust industry will face the inflection point at the third and fourth quarters of 2014, the amount of principal and interest payments of trust products will reach a new record, and remain the same in 2015. A large number of principal and interest payments and rising bad loans will likely impact the entire trust industry.
Trust industry will encounter a new round of restructuring, due to lack of capital buffers, trust will likely face bankruptcy, merger or sale of non-performing assets to the four asset management companies. With the decline in asset size of the trust industry, industry concentration ratio will increase. Lack of proper management system under the rapid growth in the size of the assets of the trust has led china industry risk accumulation and concentration. End-user of trust funds is undertaken company which precisely difficult to obtain bank loans for develop capital- intensive projects.
Real estate projects, infrastructure projects and local governments to support the mining project is a major capital flows on trust products. By end of 2013, the flow of funds in these three sectors accounted for 53.6% of the trust products.(Yifan Hu) China Trust Industry Association (China Trustee Association) said that the trust industry assets, 35% of investment in infrastructure energy, mining and real estate sectors. But the Nomura economist (Zhiwei Zhang) thinks the actual proportion more than 50%. These situations show that half of the trust industries have relied on the infrastructure, energy, mining and real estate hardly. China’s ‘golden years’ in these industries have promoted trust industry growth. However, at the end of the ‘golden years’, the investment in these four areas are becoming increasingly risky. (Wall street journal) Otherwise, the rapid development of these trust products has led to the inevitable rise in delinquencies, making investors faced with the possibility of loss. With the expiration of the trust for 2014 and 2015, shorter term interest rates and a higher level of trust, will face increased risk of default. (Caixin 2014)
Trust products are concentrated on the rapid rise in non-performing loans industry. Additionally, Real estate trust is subjected to the real estate market and it is a big risk of mining trust products on the collateral valuation.
Trust industry has a longer ‘no breach’ of history because trust the government to protect or advance funds for breach of trust products. Unconditional payments are more common in the past. The central bank, the CBRC, CSRC and the ministry of Finance in 2004 and 2006, respectively, jointly issued two regulations, the establishment of investor protection fund to repurchase which held by individual investors liquidated certain debt(personal deposits, bonds and financial institutions trust products and other creditors). The characteristics of these two regulations are repaid investors based on the proportion of funds that invested their size and showed an inverse relationship, which means that less investment amount of investors will receive a greater proportion of compensation, trust problems in the trust implicit promise rigid payment products, but because of the capital of the trust industry and prepare for the potential loss of metallurgical inadequate size, rigidity payment in the next few years is expected to be broken. In this unfavourable context, the banking industry will therefore face higher non-performing loans and the sharp decline in profitability.
Freeze in the interbank market is the key risks. Trust products are the core of inter-bank activities and rapid development of robust growth. Banks can get help from issuing trust products to venture by using some complex bridge’s chains of the banks to provide loans in the trust. Bank will ultimately benefit from the high-yield and risky loans connected to the original by purchasing a trust beneficiary in the interbank market. In 2013, the trust beneficiary with business activities related to an estimated $1.35-2 trillion yuan, equivalent to 17.8%-26.3% which equal the total size of single trust assets (Fan Zhang).
With an increased risk of default in trust industry, the government has adopted new regulatory systems which include no.99 and no.127 to manage the inter-bank activities. However, government needs to further increase supervision and extended to the entire shadow banking sector, including internet banking, trust, leasing, companies, credit guarantee companies and money market fund.
Research questions
The research study aims to address the following questions:
- Why doesn’t china trust developed rapidly in recent years?
How will china trust develop in next years?
- What kind of investments people prefer?
- What differences between trust and funds?
- What is the risk of trust fund?
If the above questions are answered, the main characters of trust might be known. Research objectives
The main objective of the research study is to discover the main economic impacts of trust in China and find chances on appreciation of property by which the potential trust market in china. It is important to know how to manage our property and trust funds is a good way to achieve it. Before we invest a project, we should know clearly risks and profits. Then make decisions which depend on our risk tolerance.
The objectives for this study are as follows:
- to understand what influences trust funds in china economy.
- to examine the characteristics about trust funds and financial products.
- to determine risks and profits during the investment.
- to investigate trust in world trust industry in order to find stimulations for china trust.
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative (Graham 1949). Trust is definitely investment. The origins of china’s trust sector stretch back to October 1979 with the establishment of China international Trust & Investment Co. (CITIC). From these beginnings, trust developed rapidly until late 1990s when China’s real estate markets ran into trouble. During this period the problems and debt stemming from trust operations dealt a serious blow to the sector. In October 2001, two Trust law were released in order to reform the sector by first improving regulatory oversight and establishing a framework for punishing companies operating outside of the law, as well as to dramatically limit the business scope of trust and investment companies (TICs). Then TICs have developed rapidly, driven by promises of high returns. Overall the trust sector has seen dramatic profit growth since 2004, but there has been a significant drop in profit from 2007 to 2008. Almost every single company has losses associated with stock investments (China trust sector 2010). It means the profit of trust must relate to whole business trend, because china stock market was so bad at that time.
The reforms in 2007 significantly reshaped the operating scope as well as the market overlook in trust-fund industry. Considering the overall growth in this field since the reforms took place, it is anticipated that new companies will join the market in 2010.
These newly-restructured entities will attract partners to invest in them thanks to the distinctive role of the new ones plays in the market. Nevertheless, international and domestic investors have to bear in mind with a great amount of obstacles—namely, the limits posed on IPO exits for PE investments, the ban of opening new stock accounts and restrictions on the scope of cooperation between banks and trusts—in particular, the last one will directly impact the industry, since it will cause a reduction in income related to single unit trust products. Major companies might handle this well, whereas the relatively smaller and newer ones might be halted. Trust companies would get more stable earnings by offering investors personalized products which depend on their risk assessment, because significant risk management and corporate governance issues remain and will also have to be addressed in the near future (China trust sector 2010).
Trust companies have shown the highest level of diversification and innovation of any other product over the past year. The competition from the financial services industry is predominantly driven from securities companies with their increasing wealth management capabilities. There also exists a great deal of variance across trust companies, both in terms of the way they interact with clients and how they operate as a business. This is reflected in the fact that many services or products can be specific to a limited number of trust companies. (China trust survey 2012)
The demand for wealth management is the foundation of trust industry’s survival. Since the policy of reform and opening up was introduced, China economy has grown rapidly and made a lot of wealthy residents. Chinese residents will put forward great demand for trust industry because they need to maintain and increase the value of their wealth or to transfer their wealth. (Wei Tang 2014) Therefore, trust business is heated up from commercial bank, securities company, insurance company. They help their investors
to manage property by trust business.
A trust is formed when a trustee holds the assets and runs the business, distributes incomes to beneficiaries, and follows the provisions in the trust deed.
Advantages:
Limited liability is possible if a corporate trustee is appointed.
The structure provides more privacy than a company.
There can be flexibility in distributions among beneficiaries.
Trust income is generally taxed as income of an individual.
Disadvantages:
The structure is complex.
The trust can be expensive to establish and maintain.
Problems can be encountered when borrowing due to additional complexities of loan structures.
The powers of trustees are restricted by the trust deed(Tasmanian Government 2014).
Risk management should be the key strategic differentiator of a trust company. There are four different perspectives to analyse risk management. First, it is hard to observe in other areas of the financial services sector from different strategic risk. Second, major compliance and regulatory obstacles challenge the trust companies, especially in areas of tempered growth. Third, as financial services are moving into a more mature phase of its development, trust companies need to enhance their project monitoring and risk assessment. Lastly, credit risk seems to
