Key Points:

  • The aggressive expansion of real estate trust businesses is considered “indiscreet”
  • Local branches and the trust companies themselves are required to strengthen their compliance checks and risk monitoring
  • Sanctions would be imposed in the case of violations

The China Banking Regulatory Commission (CBRC) issued a Notice on Being Cautious of the Risks Brought About by Real Estate Related Trust Businesses Conducted by Trust Companies on 12 November 2010 (Notice). This Notice is viewed as another attempt by China’s government to curb high housing prices and to prevent the real estate market from being further destabilized by excess liquidity.

Risk Evaluations to Be Carried Out by the Trust Companies on Each of the Real Estate Projects

The Notice is addressed to all the local bureaus of CBRC as well as trust companies that are supervised by CBRC. CBRC declared at the beginning of the Notice that real estate trust businesses have been growing rapidly and some trust companies are not conducting this type of business discreetly. In order to effectively implement the State’s policy of regulating the real estate market, and to reduce risks for trust companies, CBRC requires all trust companies to immediately conduct thorough evaluations of their compliance with existing law and risk exposure within their real estate trust businesses.

The evaluations to be carried out by the trust companies for each of the real estate-related trust deals will cover the following factors:

  • The completeness of the permissions and approvals (commonly known as “four certificates”) required for the real estate project funded by the trust, the minimum qualifications for the real estate developer and its controlling shareholder, and compliance with the government’s requirement for the maximum funding leverage within real estate projects;
  • The adequacy and reliability of repayment sources;
  • The adequacy of pledge, mortgage or other forms of security; and
  • The solvency of the project company and backup plans to address insolvency risks.

Supervision and Monitoring by Local Bureaus of CBRC to Be Strengthened

The Notice further requires local bureaus of CBRC to enhance their risk and compliance monitoring of the companies’ real estate-related trust businesses within the respective jurisdictions of the bureaus. In conjunction with the results obtained from the stress tests that were conducted earlier this year, and based on the aforementioned self-evaluations to be conducted by the trust companies themselves, the bureaus will examine the merits and legality of the individual deals entered into by the trust companies, with a particular emphasis on the type of transactions that were designed to disguise the purpose of providing loans in the name of debt transfers on the face. If violations are identified during the self-evaluation or the bureaus’ examination, the bureaus will take immediate actions to order the relevant trust companies to cure the offenses or to penalize such offenses. The Notice further sets a timeline for all local bureaus to report the results of their actions to CBRC before 20 December 2010, and declares that CBRC will consider sanctioning the bureaus or the responsible officials that fail to enforce the Notice effectively.

The harsh actions being taken by CBRC towards the trust deals financing real estate projects are not ungrounded. An official within the regulatory body points out that the stringent monetary policy and the shortage of funds that used to be primarily provided by the banks have increasingly driven real estate developers to reach out to trusts, real estate funds or overseas funding sources. The data published by China’s Trust Industry Association suggests that the money that was raised through trusts and went to the real estate industry had a sharp year-on-year increase of 57 percent as of the end of September 2010, despite the relatively high interest rates (some of which may have been as high as 15 percent per year) charged. However, the regulatory bodies obviously hold a different view as to the risks and broader consequences that may be brought about by this trend, despite the financial performance of the market.