21 Financial Research丨The scale of trust has declined but the ability to make money has increased How to break the risk of dislocation between nominal and actual bearers?

Zhu Yingzi, a researcher at the 21st Century Institute of Finance

Even if trust projects are frequently overdue and some risk institutions are being disposed of, it is undeniable that the entire trust industry is still taking off on the growing wealth of residents.

According to the data released by the China Trust Industry Association authorized by the China Banking and Insurance Regulatory Commission, in the first half of 2021, the trust industry achieved operating income of 60.231 billion yuan, an increase of 9.41% year-on-year; the total profit was 39.586 billion yuan, an increase of 16.08% year-on-year.

The number of individual trust investors is also growing rapidly. According to the data disclosed by China Xindeng, as of the end of the second quarter of 2021, the number of investors in the stock of trust products has reached 966,800, a net increase of 79,200 from the end of the first quarter, an increase of 8.79%. Among them, there were 924,500 natural person investors, a net increase of 73,700 in the second quarter, accounting for 94% of the number of new investors.

The dilemma between the growing demand for residents' wealth and the lack of fiduciary responsibilities needs to be solved urgently, which is also the purpose of the "Guiding Opinions on Regulating the Asset Management Business of Financial Institutions", which brings all asset management products that are "entrusted by others and managed on behalf of others" into unified supervision and clearly divides risks and responsibilities.

In terms of longitudinal comparison, the scale of trust assets at the end of the second quarter of 2021 was 20.64 trillion yuan, which was 2.5 trillion yuan lower than the end of the second quarter of 2017. Although the scale is declining, the profitability of the trust industry is increasing, and the total revenue and profit in the first half of 2021 are 10.4 billion yuan and 3.1 billion yuan higher than those in the first half of 2017.

From the perspective of the type of capital, as of the end of the second quarter of 2021, the scale of financial institutions, financial products, non-financial enterprises and natural person investment trust products accounted for 40.26%, 19.72%, 15.76% and 24.26% respectively, reflecting that financial institutions are still the most important source of funds for trust product investment.

However, among the investors who added trust products in the second quarter of 2021, the investment scale of financial institutions fell by nearly 50% year-on-year, indicating that there is a trend of continuous contraction under the continuous role of regulatory policies such as "two pressures and one drop" in the industry, and the phenomenon of regulatory arbitrage between inter-industry institutions has been further suppressed.

At the same time, natural person investors accounted for 94% of the number of new investors, indicating that the role of the trust function in entrusting financial management and supporting the preservation and appreciation of personal wealth has become more and more recognized.

On the other hand, the risk projects exposed to the trust industry are still increasing. According to incomplete statistics on the public information combed by the utility trust network, in the first half of 2021, there were 105 default events in the trust industry, involving an amount of more than 40 billion yuan. From the perspective of capital investment, real estate and industrial and commercial enterprises are areas with a high incidence of default events.

This accelerated exposure to risks is also reflected in AMC's distressed disposal of trust assets. According to the data disclosed by China Orient Asset Management Co., Ltd., it acquired the original value of the non-performing debts of trust companies in the first half of 2021 by 16.5 billion yuan, an increase of 251% year-on-year.

As a result, the most concerned event in the trust industry in the first half of 2021 is the dispute between investors and trust institutions over risk and fiduciary responsibility, which is expected to continue for some time.

Since 2012, the asset management business of China's banks, securities, trusts, funds, insurance and other institutions has entered a stage of rapid development, and cross-industry asset management cooperation between various institutions has become closer.

At the end of 2018, the scale of specific purpose carriers, including valet wealth management, capital trusts, and securities investment funds, reached 53.5 trillion yuan, compared with GDP of 58.2%, an increase of 46.4 percentage points over the end of 2007.

Yi Gang, president of Chinese Min Bank, pointed out in an article published in 2020 that the development of asset management business has met the requirements of residents, enterprises and financial institutions for wealth preservation and appreciation and diversified asset allocation to a certain extent, but there are also problems such as multi-layer nesting of products, term mismatch, information opacity, circumvention of supervision, rigid payment, and some are actually "loan-like" financing.

In his calculation of the risk bearing of financial assets, Yi Gang found that in recent years, the risk of financial assets has been significantly concentrated in financial institutions such as banks, and a considerable part of the risks of financial institutions must ultimately be borne by the government.

At the end of 2018, the scale of financial assets at risk borne by financial institutions and government departments was 365.9 trillion yuan and 118.7 trillion yuan respectively, which was 5.85 times and 2.60 times that of the end of 2007, accounting for 54.5% and 17.7% of all financial risk assets, totaling 72.2%. In this set of calculations, for wealth management and trust, it is assumed that 80% of the risk is borne by financial institutions.

Such a large risk asset, but not enough capital to hedge. This is also the reason why the regulator has advocated in recent years to steadily break the rigid payment, aiming to change the misalignment of the nominal and actual bearers of some financial asset risks.

Some insiders pointed out that when asset management institutions are set up and issued, they are in a serious state of information asymmetry with investors. When investors buy products, they cannot obtain sufficient information to judge risks, and even investors do not have the ability and foundation to judge risks, but only rely on trust in institutions and past performance, or even just rely on the marketing behavior of salespeople. Moreover, non-standard debt products lack liquidity, and it is difficult for investors to re-transfer to diversify risks. Therefore, when asset management institutions carry out non-standard debt business, the nature and characteristics of such products (basically do not have liquidity) and characteristics (serious information asymmetry between issuers and investors) make it difficult for asset management institutions to get rid of the responsibility of rigid payment.

So, how can we get out of this dilemma?

Industry insiders believe that asset management institutions should completely solve the problem of rigid payment, focusing on the development of investment business.

This requires asset management institutions to do a good job in three aspects: First, do a good job in the project roadshow when raising funds. Fundraising and product sales are essentially the same, but the stages may be different. Product sales are often various transaction conditions have been determined, even documents have been signed, investors are relatively passive; fund raising, especially equity investment projects, asset management institutions should fully introduce project information, transaction structure, exit conditions, risk status, etc. to potential investors in the early stage, and investors should have a fuller understanding of the information.

The second is information disclosure in the management process. As a project manager, asset management institutions should disclose information to investors in a more timely and adequate manner, reveal possible dynamic risks, and timely valuation of standard projects, while the information disclosure of non-standard debt projects is often a formality.

The third is to do a good job in project withdrawal. Standard investment projects, good liquidity, investors exit conveniently. Equity investment projects, often when the project is established, will design a number of exit channels, compared with non-standard debt projects, more flexible.

The regulatory authorities have also taken measures from four aspects: one is to reduce the scale of non-standard financing trusts; second, to support the capital increase and restructuring of trust companies; third, to put forward higher requirements for the risk compliance management and internal control construction of trust companies; and fourth, to find ways to expand risk mitigation channels.

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