China Weighs Tougher Capital Requirement on Some Trust Holdings

(Bloomberg) -- China’s banking regulator is considering asking trust firms to set aside more capital for any trust products they invested in that have one year or longer until maturity in its latest attempt to curb risks in the $3.1 trillion industry, according to people familiar with the matter.

Trust firms may need to set aside 100% of the value of products compared with the previous requirement of 10%, said the people, asking not to be identified for discussing a private matter. The China Banking and Insurance Regulatory Commission is seeking feedback from some trust firms, said the people.

The rule change would apply to all new investments immediately, while regulators would give trust firms a grace period to meet the provisions requirement for existing holdings, two of the people said. The CBIRC didn’t immediately reply to an email seeking comment.

China’s 21.6 trillion yuan ($3.1 trillion) trust industry, a key alternative source of funds for weaker companies, is under growing regulatory scrutiny as defaults among its investment products are predicted to double this year amid the strains of the coronavirus outbreak. About 300 of trust products are expected to default this year versus last year’s record of 118, estimated Xu Zijun, a Beijing-based senior analyst at Reality Finance Research.

China’s 68 trust companies invest in everything from bonds to wine while funding loans to firms including debt-ridden developers and local government financing vehicles. Over the past few years, authorities have taken a series of measures to rein in the fatest growing shadow banking sector.

The banking regulator on Friday issued draft rules to cap trust firms’ total investments in so-called non-standard credit assets, typically loans, at 50% of the funds they raise from the public. Trust funds are also banned from directly investing in commercial banks’ credit assets.

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With assistance from Bloomberg