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Line between banking, trusts increasingly blurry

By Lan Rixu | 2016-10-11 | Hits:
(Chinese Social Sciences Today)

The picture shows the site of the Shanghai Commercial Savings Bank. Although the bank never used the term “trust,” it started dealing in the trust business in 1917. Today, the building is occupied by a branch of the Bank of China.


The banking industry in modern China tended to operate according to a mixed management framework. The overlap between trusts and banking enterprises made it difficult to draw a clear cut distinction.

When trusts were introduced to China from abroad, there was little understanding about how they should operate in practice, so trust companies engaged in the banking business. At the same time, banks also intensively developed their trust business portfolios, and ultimately exceeded trust companies in terms of scale and financial resources.


Fierce competition
When trusts were introduced to China, it was more than half a century after other forms of modern finance, such as banking and insurance. In 1913, China’s first trust institution, the Japanese-owned Dairen Staple Produce Exchange, was founded.

Afterward, the trust industry underwent monumental development across the country. In 1921, a surge in the number of stock exchanges spurred rapid growth in the amount of trust companies. From May to July 1921, 12 trust companies were set up in Shanghai, including Zhongyi, Shanghai and Dazhonghua. In the same year, a financial crisis occurred in Shanghai due to the opening of too many trust companies and stock exchanges, which inflicted devastating blows on newly established trust companies. Only two Chinese trust companies survived in Shanghai: the Central Trust and Tongyi. After that, banks developed their trust portfolios rapidly.

Unlike trust companies, which were the result of excess stock exchanges, the trust business of banks took shape due to various conditions at home and abroad. First, after the founding of the Republic of China (1912-1949), the political landscape of a unified nation was replaced by the division of the country among local warlords. Wealthier families, such as businessmen and landlords, who were once distributed throughout the mainland, poured into cities with open ports and concession areas where their assets were safer. This led to the exponential growth of Chinese banking capital.

Second, due to fierce competition and intense pressure from traditional domestic financial institutions and foreign banks, Chinese banks had relatively little margin for profit. To cope with this situation, the Chinese banking industry took comprehensive innovative measures, which brought low returns to the banks because of the restrictions from many factors, including the vicious financial environment. In this context, it was necessary for the Chinese banking industry to continue to expand its business in order for it to survive and develop further. Therefore, the trust industry naturally became a target of competition for Chinese banks after its entry to the mainland.

In 1919, the Shanghai Branch of the Bank of Juxingcheng set up a trust section—the first of its kind in Chinese history—marking the birth of the modern trust industry in China. The beginning of the Chinese trust business, however, could be traced back to the Shanghai Commercial Savings Bank. Although it never used the term “trust,” it started dealing with trust business in 1917, when the bank set up a section providing custodial services to clients: 140 wooden safe deposit boxes were purchased and then 200 steel ones were added. Some were rented to clients, and others were used to keep all the important documents of the bank.

In 1921, the Shanghai Commercial Savings Bank reorganized the custodial section into a trust section. Later on, as the trust business continued to expand, “trust services were added, such as selling and buying securities, collecting rents and stock dividends, issuing letters of guarantee for offices and duties, and commercial letters of guarantee on behalf of the clients.” Aided by the added profit earned from their trust sections, banks developed rapidly. In 1937, there were 12 trust companies in the country, while banks engaged in trust business totaled 42.


Early development
As a multitude of Chinese banks developed trust portfolios, they gradually found various ways to operate trust services. In addition to setting up certain organizations as trust or insurance sections within the banks to deal with trust business, they also held stock in trust companies, including newer or more established ones. A classic case was the Chengfu Corporation, which was set up in Tianjin in 1925 and later renamed the Chengfu Trust Corporation in 1929.

In 1935, it was purchased and reorganized into a trust corporation specializing in business management by two banks—Zhongnan and Jincheng—each holding a half share of capital. The clients of this corporation included the cotton-spinning mills of Hengyuan, Beiyang and Xinyu. The corporation was able to make practical improvements, thereby contributing to the revitalization of one of China’s core industries.

However, it is not easy for an enterprise to base its revenue entirely on trusts. Affected by the War of Resistance against Japanese Aggression (1931-1945), the environment for business continued to deteriorate. The Chengfu Trust Corporation had to change its original plans and embarked on the business of cotton, yarn and cloth as well as speculating on the stock exchange. In 1943, it found a balance in its income from trust management and returns from speculative business.

What deserves more attention was the founding of independent trust companies, which were directly set up by banks and were either wholly or jointly owned with other institutions. A classic example was the Central Trust Bureau established by the Central Bank in 1935. Apparently, unlike trust companies with stocks partly held by private banks, the Central Trust Bureau was intended to facilitate procurement for the national government. It imposed a compulsory savings deposit on military and civil servants. Favored by governmental prerogative, it expanded business swiftly, head and shoulders above the business of the trust sections of not only such private banks as Zhejiang Xingye, Shanghai Commercial Savings, Jincheng and Juxingcheng etc., but also state-run banks, such as the Farmer’s Bank of China, Bank of Communications and Bank of China, etc.

As banks became increasingly involved in trust business, the boundaries separating trust business of banks and the services of special trust companies were blurred. Both contributed to the development and prosperity of the trust business in China. However, whether it is a trust institution or a bank, these two were different only in name, as their business models had significant overlap. Both of them offered the following services: dealing with trust funds, property or asset management, real estate trust, custody and safe deposit boxes, trust of company debts, liquidation and reorganization, company stocks, transfer and registration of bonds, selling and buying securities, insurance, assurances and guarantees, will execution, or living trust, guardianship and other trust businesses.


Blurred distinction
Banks engaging in the trust business in modern China are largely the product of the special financial environment. Chinese banks directly invested in or set up trust companies only after the 1920s, propelling the rapid development of China’s trust industry. Similarly influenced by banks’ involvement in the trust industry, trust companies also began offering banking services in addition to their trust service, resulting in a tendency for trust companies to operate as banks.

Therefore, it was very difficult for people at that time to distinguish between banking and trust organizations. This direct interaction between banks and trust companies ensured that trust services have always been controlled by Chinese trust companies and banks, although trusts, as a foreign invention, were started in China by a foreign-owned company.

Trust services have enhanced the strength of the Chinese banking industry so much that shortly after their establishment, they were able to rank among the top industries in the Chinese financial sector. They stood out in their competition with foreign-owned financial institutions in China and traditional financial organizations that existed in China at the time.

By diversifying a sector originally monopolized by foreign-invested financial institutions and gradually taking it, it partially achieved the dream of Sheng Xuanhuai, founder of the Imperial Bank of China, the first bank in China: to save the nation with industry. Sheng said: “It is high time that China followed the examples of foreign banks in business operation, we must not let them take exclusively all our golden eggs…The country must be made strong and prosperous by preventing our fortunes fron flowing to foreign countries. If a bank of China is not established without delay, we cannot infuse energy forces into Chinese business, and put an end to the abuse of foreign businesses.”

From then on the Chinese banking industry, operating in this form of mixed management, has gradually grown strong. After the 1920s, some consortiums were built: the North China Consortium, comprising “four northern banks;” the Jiangsu and Zhejiang Consortium, comprising “three southern banks” and the Bank of Zhongjiao; the West China Consortium, with the Bank of Juxingcheng at its core; and the South China Consortium, with, among others, the Bank of Guangdong as a member. 


Lan Rixu is from the School of Economics at Central University of Finance and Economics.