Friday 12 December 2014

China publishes rules to pave way for trust insurance fund


China published rules on Friday governing the management of an insurance fund planned for its $2.1 trillion trust industry, a move to reduce financial risk in shadow banking.

The fund, the first of its kind, will mark the capstone of Beijing's long campaign to insure all of the country's financial industries, preparing the way to allow more defaults and bankruptcies.

China has established similar funds for securities, insurance and commodity futures companies. It is preparing to set up its first deposit insurance fund to protect bank customers.

The rules will apply to all trust firms and the industry body, China Trustee Association, which will be required to contribute to the fund. The new rules were published jointly by the China Banking Regulatory Commission (CBRC) and the Ministry of Finance.

Unlike the other insurance programs, the trust firms will not use the funds to compensate investors in the case of bankruptcies. Instead, they will be used in the liquidation and restructuring of companies that received trust investment.

"The trust insurance fund will only be the last resort to help rescue trust companies instead of conducting compensation payments," a CBRC spokesman was quoted in a statement as saying.

"Assuming the role of a 'security network' for the industry, the fund will effectively separate risk in industry from the government ... and help digest the risk of individual trusts within the sector," the spokesman said.

The rules listed five situations in which the fund will help bail out individual firms. These include when a trust is declared bankrupt, is short of capital to support its operations or is ordered to close for irregularities.

All trust firms must contribute 1 percent of the value of their net assets to the fund, the rules said. The rules come into effect immediately, but regulators did not say when the fund will be set up.

Assets under management at China's 68 trust firms rose to 12.95 trillion yuan ($2.1 trillion yuan) by the end of the third quarter this year, making trusts the single biggest financial sector after commercial banks, official data shows.

The trust industry's scale has expanded rapidly in recent years, part of Beijing's strategy to diversify funding channels and credit pricing in a system once entirely dependent on state-owned banks, but high-profile defaults on trust products earlier this year raised concern over systemic risks.

(Reporting by Lu Jianxin and Pete Sweeney; Editing by Neil Fullick)

Source: Reuters

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