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China's trust and investment companies have been urged to tighten their risk controls and management when undertaking rapid expansions of their business.
The alarm bell was sounded in the industry when the Jinsin Trust and Investment Co defaulted on the repayment of a trust product earlier this month.
Jinsin, which is based in northwestern China's Xinjiang Uygur Autonomous Region, was unable to repay investors in a trust which had matured.
The trust, launched in July 2003 with a scale of 86 million yuan (US$10.4 million), targeted investment in the merger and acquisition of some milk companies. Investors in it should have expected an annual return of 5.2 percent.
But investors felt their trust had been betrayed when the default occurred. Some demanded that the company and its custody bank, the Bank of Communications, return their money, but the best they can get so far is a "promise" from Jinsin recently that it would "try" to compensate them after selling some of its own assets.
Analysts said that although the Jinsin incident is rare, its impact may be strong enough to affect the whole business, in which credit is its lifeblood.
The Jinsin case reflects the systematic flaws in the sector and also reminds people of the risks involved, said a trust industry expert at Renmin University of China.
Some investors may have been misled by the sellers, regarding the trust project as 100 percent safe and neglecting the risks, but they should learn the lesson that money can be lost as well as earned, he said.
Trust companies themselves are also facing the problem of risk management and information disclosure. They have to improve management and release information accurately to meet commitments to their investors. Otherwise, one fault may damage their reputation and no one will be willing to buy their products in the future.
China's trust industry has boomed since last year, following an industry-wide clear-up that lasted several years and closed down many firms in the sector, leaving just 59 qualified to remain in business.
Most trust projects in China are currently based on infrastructure and real estate projects. Some firms also undertake trusts related to the financial sector, such as asset securitization, loans, mergers and acquisitions.
Regulators may now be more supportive of innovation, but they are also very cautious about potential risks, said Wu Dayong, vice-president of China Credit Trust Co Ltd.
"The Jinsin case has certainly pushed them to tighten supervision," he said.
Poor management and internal controls are generally regarded as the factors behind Jinsin's default.
Self-discipline is also crucial for the sustainable development of the business as a whole.
After years of preparation, China's first trust industry association is finally expected to be launched in September or October, said Wu, who is leading the preparatory work of the self-regulating organization.
The association had received all necessary approval by June and should hold a general meeting of its members in September or October.
By then, a constitution and code of ethics will be drafted, he said.
The organization will hopefully enhance communication between the trust firms, investors and regulators, said Wu.
(China Daily July 22, 2004)
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