Due to strengthened regulation since the introduction of the new asset management regulations in 2018, and the prevention and control measures against covid-19, the scale of the trust industry has decreased significantly. However, the asset risk rate in the trust industry has not declined. At the end of the first quarter of 2020, there were 1,626 risk projects in the trust industry and the scale of risk assets was RMB643.1 billion (USD99.1 billion), with an asset risk rate amounting to 3.02% – 0.35% higher than at the end of 2019.
On 28 April 2021, the China Banking and Insurance Regulatory Commission (CBIRC) issued the Notice on Promoting the Co-operation between Trust Companies and Professional Institutions in the Disposal of Risk Assets, which, from the perspective of promoting the resolution of risk assets in the trust industry and the transformation and development in trust industry, defines the issues related to the co-operative disposal of inherent non-performing assets of trust companies and risk assets of the trust industry by the China Trust Protection Fund (CTPF), the Asset Management Corporation, and local asset management companies (AMCs) and other professional institutions.
The notice first points out that AMCs should explore multiple modes to dispose of risk assets.
(1) Trust companies should sell off risk assets to professional institutions or special purpose carriers established by professional institutions in co-operation, and give full play to the advantages of professional institutions in terms of funds, talent, service networks and information resources in the disposal of risk assets.
(2) Trust companies can also entrust professional institutions to provide services related to the management and disposal of risk assets, and carry out risk disposal in the early stage of risk, so as to improve disposal efficiency.
(3) AMCs should continue to co-operate with trust companies in disposal and management after acquiring risk assets.
(4) AMCs should explore diversified disposal modes and carry out subsequent disposal through batch transfers, securitisations, and restructurings of finance and management.
The CTPF can use its own funds, or use the trust protection fund, with the approval of the fund council to participate in the disposal of risk assets, according to its business scope and the provisions of article 19 (5) (“other circumstances”) of the Measures for the Administration of Trust Protection Fund. The scope of commercial acquisition by AMCs is the non-performing assets of domestic financial institutions. AMCs can participate in the disposal of risk assets of trust companies with their own funds, or by financing according to law.
The notice also emphasises the construction of a market-oriented mechanism for the disposal of risk assets, which is reflected in asset valuation management, asset selling methods, subjects involved in the disposal of risk assets, confirmation of subjects of trust products loss, loss identification and division, and replenishment of capital after loss. The notice specifies that the loss sharing between the investor and the trust company, and the compensation liability of the trust company, can be determined through consultation or judicial ruling.
Market-oriented mechanism means that the opinions of independent third-party intermediaries on asset risks and values should be taken seriously, and the identification of asset risks and values should be through consultation and game playing by multiple parties. Along with differentiated responsibilities, there is the possibility of transfer of risk assets at a discount, which gives such subjects as AMCs the motivation to participate.
The notice finally emphasises the standardisation of the transfer of risk assets and the main responsibilities of all parties. The notice specifies that the scope of risk assets includes inherent non-performing assets or risk assets of the trust industry, and its credit risk classification is in reference to the loan risk classification regulations of the CBIRC. Assets under non-standard fund pools and other financing trust products with liquidity risk are also listed as risk assets. The asset acquisition by professional institutions and trust companies should be a buyout, which should embody the principles of authenticity, cleanliness and integrity. Trading behaviour should not help trust companies to conceal risks, operate with hidden leverage, or evade regulation.
First, AMCs can participate in the disposal of risk assets by setting up special purpose carriers with the CTPF, and set the priority of investment and exit according to the risk assets and capital needs, so as to give full play to their advantages in value discovery, promotion and realisation. The collaboration will not only pool funds, but also combine the authoritative position of the CTPF and its “rescue” experience in the trust industry with AMCs’ extensive resources and experience in the disposal of distressed assets.
Second, when AMCs accepts the transfer of risk assets at a discount, they should distinguish different transfer requirements corresponding to inherent non-performing assets, risk assets of the trust industry, and assets under other financing trust products. For the risk assets other than the inherent non-performing assets, AMCs should participate in the negotiation with the client or investor and, subject to full transparency of information, urge the trust company to do a good job in the identification and division of risk-bearing subject and loss, and conduct the transfer after drawing up an effective agreement. When necessary, AMCs could urge the investors to determine responsibility sharing through litigation.
Third, AMCs should conduct due diligence when participating in the disposal of risk assets, and arrange the transaction structure according to laws and regulations. AMCs should buy out risk assets as a whole, and any agreement reached with trust companies outside the asset transfer contract to change risk sharing and income distribution in an attempt to evade regulation may not only subject it to regulatory punishment, but also be deemed invalid, resulting in losses.
To sum up, the risk assets of the trust industry amount to nearly RMB700 billion, and AMCs’ participation in the disposal of risk assets can achieve new growth in performance while helping trust companies to complete risk resolution and transformation and development, and play an active role in the future business fields of pension and medical care, charities, high net worth customer wealth management, and intergenerational inheritance of wealth.
Wang Zhenxiang is a partner at Jingtian & Gongcheng
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