* Trust companies urged to improve liquidity safeguards
* Concern over maturity mismatch between assets and
* Regulator wants to halt trust companies' "fund pools"
By Hongmei Zhao
HONG KONG, April 14 China has issued stricter
guidelines governing trust companies, two sources with direct
knowledge of the rules told Reuters on Monday, in a bid to
counter systemic risks posed by the biggest players in the
country's shadow-banking sector.
Trust companies are non-bank lenders that raise funds by
selling high-yielding investments known as wealth management
products (WMPs) and use the proceeds to fund loans to risky
borrowers such as property developers, local governments and
others to whom banks are reluctant to lend.
The new rules from the China Banking Regulatory Commission
(CBRC) aim to reduce liquidity risks associated with
off-balance-sheet WMPs by forbidding trusts from operating
so-called "fund pools" that enable them to fund cash payouts on
maturing products with the proceeds from new WMP sales.
The latest guidelines appear consistent with regulators'
overall approach to shadow banking, which has become an
important funding source for weak borrowers. Policymakers have
encouraged the rise of non-bank lending as a means to diversify
China's bank-dominated financial system, while issuing targeted
rules to curb the riskiest practices.
The guidelines also require trust companies to develop clear
mechanisms for shareholders to provide emergency support to the
trust firm during periods of liquidity stress.
Regulators are concerned that liquidity problems with a
single trust product has the potential to ignite systemic risk,
said a trust industry executive who has seen the document. He
said the document signals that liquidity risk will be a key
focus for regulators this year.
"Fund pools" refer to pools of cash and credit assets from
various different WMPs that banks and their trust company
Regulators have increasingly focused on such structures over
the last year, targeting the liquidity risk posed by the
practice of using proceeds from the sale of new WMPs to finance
cash payouts on maturing products. China's securities regulator
has compared such practice to a "Ponzi scheme".
Regulators want trusts to strictly match each WMP with a
specific set of underlying assets, rather than pooling cash and
assets from different products together into common pools.
Trusts face pressure to use fund pools because doing so
allows them to offer more attractive yields on the WMPs they
sell. Such products typically carry a maturity of a year or
less, even as the assets underlying such products are often
longer-term loans that can't be easily sold when the WMP matures
and cash is due to investors.
Such risks came to the fore last June, when a nasty
liquidity squeeze roiled China's interbank money market, sending
short-term borrowing rates as high as 30 percent. Money-market
traders at the time cited the concentration of maturing WMPs as
one factor contributing to excess cash demand.
Trust companies and banks often rely on borrowing from money
markets to fund payouts on maturing WMPs for a few days until
they complete fundraising on new products.
Several high-profile defaults on trust products earlier this
year based on loans to struggling coal producers raised concern
over systemic risks.
Assets under management at Chinese trust firms rose to 10.9
trillion yuan ($1.8 trillion) at end-December. Trusts surpassed
insurance companies last year to become the largest sector of
China's financial system behind commercial banks.
In addition to the focus on fund pools, the CBRC guidelines
also require trusts to reduce lending when their capital levels
fall due to losses. The regulator also pledged to tighten the
approval process for trusts to expand into new business lines.
(Additional reporting and writing by Gabriel Wildau; Editing by