The Perilous Condition Of Debt-Related Financial Institutions In China – Analysis


By He Jun

Since the enactment of China’s Trust Law 22 years ago, the first case of a trust company going bankrupt has emerged. After nearly a year in the bankruptcy process, New China Trust was officially declared bankrupt by a court in Chongqing on May 26. With the bankruptcy of New China Trust, the number of trust licenses in the country has decreased from 68 to 67.

New China Trust is one of the earliest established trust companies in China. It was registered on April 20, 1998, with a registered capital of RMB 4.2 billion. Its businesses include fund trust, chattel trust, real estate trust, and securities trust, and was affiliated with Tomorrow Group. In its process leading to the high-risk state and eventual bankruptcy, New China Trust did attempt to salvage the situation. On July 17, 2020, it was taken over by the former China Banking and Insurance Regulatory Commission (CBIRC), with a takeover period of one year. On July 16, 2021, it was officially announced that the takeover period of New China Trust would be extended for another year, from July 17, 2021, to July 16, 2022. Along with New China Trust, other financial institutions affiliated with Tomorrow Group were also taken over, including Huaxia Life Insurance and Tianan Property Insurance. On June 16, 2022, the New China Trust began to enter the bankruptcy process.

The trust industry in China has been developing rapidly, yet various problems have emerged in recent years. As of the end of the fourth quarter of 2022, the total assets of the Chinese trust industry amounted to RMB 21.14 trillion, with the total assets of the trust industry reaching RMB 874.232 billion, and the total equity reaching RMB 717.866 billion. With net assets of over RMB 700 billion RMB corresponding to entrusted assets of over RMB 21 trillion, considering their service capabilities and standard, it is unlikely that trust institutions of the country can effectively manage such a high leverage ratio of assets.

From the various problems that have emerged in the development of China’s trust industry in recent years, it is evident that their operations have deviated significantly from the essence of the industry and the role of trustees, gradually evolving into financial institutions similar to fundraising and financing entities. Take Anxin Trust, which previously defaulted, as an example. It failed to repay funds totaling up to RMB 27.6 billion over the past few years, causing significant losses to a large number of investors and seriously disrupting the financial market. Anxin Trust has been subject to a total of 31 administrative penalties, categorized into five major types: committing to protect trust assets from loss or ensure minimum returns; unauthorized diversion of trust assets for non-trust purposes; incomplete disclosure of risks in promoting certain trust plans; conducting shadow banking-like businesses involving non-standardized wealth management funds; and failure to provide true, accurate, and complete disclosure of information. The CBIRC previously determined that from 2016 to 2019, Anxin Trust violated regulations by using three trust assets for shareholders, eight trust assets for repaying other trust projects, and four trust assets for other non-trust purposes, totaling RMB 12.656 billion.

Considering the issues with New China Trust and the financial institutions under the Tomorrow Group, these debt-related institutions represent a high-risk group in China. Currently, the Chinese economy is facing increased downward pressure, leading to tightened credit conditions in the market. The regulatory measures to control leverage ratios in financial institutions are becoming stricter, making it difficult for these institutions to expand debt or secure financing as they did in the past. What is particularly noteworthy is that the measures taken to address debt risks in the financial industry, including the trust and insurance sectors, are reshaping the rules of this industry.

According to researchers at ANBOUND, several measures that debt-related financial institutions previously relied on are now losing their effectiveness. First, trust licenses in China no longer hold value and cannot serve as the basis for transactions. Furthermore, using licenses as assets for debt financing is no longer possible, making it difficult to rescue institutions from bankruptcy. Second, from the approach taken in dealing with Tomorrow Group’s financial institutions, the market needs to correctly understand the State Council and the People’s Bank of China’s (PBoC) direction. For debt-related financial institutions, it means that when it is time for bankruptcy, they will no longer be with government support. There will also be swift action on the government’s side to prevent the involvement of a broader range of risk events.

In fact, over the past three years, the PBoC has made concentrated efforts to address financial risks, striving to curb the upward trend of systemic financial risks and safeguard the bottom line of preventing systemic financial risks. Firstly, it has dealt with risks in multiple key high-risk groups with significant asset-liability scales, such as the Tomorrow Group and HNA Group. This includes taking over 10 financial institutions related to the Tomorrow Group, and executing the bankruptcy reorganization of HNA Group, resulting in zero equity for the original shareholders. Additionally, the central bank has comprehensively rectified shadow banking and illegal financial activities, focusing on dismantling high-risk shadow banking businesses and cross-market financial products. The scale of high-risk shadow banking with characteristics of “quasi-loans” has been reduced by nearly RMB 30 trillion from its historical peak. The newly established National Financial Regulatory Administration (NFRA) also emphasizes the need to comprehensively strengthen supervision to improve the quality and effectiveness of regulation, and properly address and resolve financial risks in key areas, so as to firmly contain incremental risks, and firmly hold the bottom line of preventing systemic risks.

In recent years, China has experienced risks triggered by debt crises in multiple sectors, with notable prominence in the financial and real estate industries. The core business of these industries is essentially a “money-making business” and falls into the category of high-debt sectors. Moreover, the debt crises are closely interconnected through the credit chain, creating potential zones for the eruption of systemic financial risks. Researchers at ANBOUND have pointed out the importance of precision in dealing with such potential risks. There are two key aspects to consider: First, it is crucial to control the risk boundaries and handle them on a case-by-case basis, avoiding simultaneous handling of issues from multiple risky institutions. Second, it is essential to swiftly sever the transmission of risks, preventing the risks of one institution from triggering risks in other institutions.

Looking at the current situation in China, it is likely that a large number of debt-laden institutions will continue to emerge. Once a series of risk exposures occur, there is a possibility of systemic financial risks to follow suit. It should be noted that the consequences of triggering these risks are different from the consequences of intense competition within the industry where it may still be possible for some to find a way out. The outcome of the former, however, will be more disastrous. Some institutions and individuals may be in a predicament, not only facing financial ruin but also bearing responsibilities that go far beyond the financial realm.

Final analysis conclusion:

The bankruptcy of New China Trust is the latest among many financial risk events in China in recent years, highlighting the high-risk state of debt-related financial institutions in the country. It is not an isolated incident but rather one that increasingly appears as the economic and financial situation of the country worsens. Debt-laden financial institutions in China have formed a sort of minefield that once a series of risks are exposed, there is a possibility of systemic financial risks to take place. Hence, the management of debt-related financial institutions should be more precisely and decisively tackled to cut off the risks.

He Jun is.a researcher at ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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