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In the first half of 2017, China's GDP growth rate reached 6.9%, the main indicators were better than expected; the macroeconomic performance was in a reasonable range and kept in a steady and sound momentum. Market confidence picked up gradually. Compared with the situation in 2017 Q1, in Q2 the so called "three stable and one good" trend emerged, which means the scale of assets under management, the amount of business income and the growth of revenue grew stably, and the proportion of trusts targeting industrial and commercial enterprises went up quarterly which was better than expected.
I. Steady Growth in Trust Assets
A. Trust Assets
Benefiting from the new development concepts of the supply-side structural reform and the new progress in the speeding up adjustment in economic structure, assets under management grew steadily. By the end of Q2 of 2017, trust assets under management of 68 trust companies reached 23.14 trillion Yuan. In terms of the quarterly m-o-m growth rate, that in 2016 Q4 was 11.29%, in 2017 Q1 was 8.65%, and in 2017 Q2 increased more mildly than before, to 5.33%. In terms of the y-o-y growth rate, since 2013 Q2 it had reached the highest point then dropped quarter by quarter, in 2016 Q2 it touched the lowest point in this period of cycling fluctuation; but in 2016 Q3 it accelerated again. And after three quarters of accelerated growth, in 2017 Q2 the growth rate had begun to slow down.
B. Proprietary assets and equity
As of 2017 Q2, the scale of the proprietary assets reached 612.968 billion Yuan, increased by 25.61% y-o-y from 487.98 billion Yuan, and increased by 6.17% m-o-m. The lowest cycling point of y-o-y growth rate of owner’s equity emerged in 2016 Q2, as well as the lowest one of trust assets did. The capital injection is the major driving force for the continuous expansion of the proprietary assets. Capital injection is to meet companies’ capital need due to net capital and constraints. Furthermore, it is to strengthen the capital for the transformation of trust companies. In the first half of 2017, nine trust companies changed the registered capital with the Industry and Commerce Administration Authorities, and the total registered capital increased by 19.34 billion Yuan y-o-y. And in the second half of 2017 this trend is expected to go on.
Since 2016 Q2 the proportion of investment assets climbed slightly, to 74.28% in 2016 Q4, to 75.90% in 2017 Q1 and to 76.85% in 2017 Q2, which increased by 1 percentage point quarterly. The scale of monetary assets was 57.32 billion, which increased by 12.53% m-o-m from 50.94 billion, and the proportion of that reached 9.35%, which was 0.5 percentage point higher than 8.82% in Q1. The absolute amount of loan assets declined. In 2017 Q2, it was 29.53 billion, went down by 4.66% (or 1.445 billion Yuan) m-o-m from 30.98 billion Yuan, and the proportion of loan assets also dropped from 5.37% to 4.82%.
As of 2017 Q2, paid-in capitals was 221.81 billion Yuan, and the proportion of that in total owners’ equity increased by 1 percentage point m-o-m from 45.41% to 46.51%.Undistributed profits were 149.03 billion Yuan, and the proportion of that was 30.51% which was 1 percentage point higher than 29.26% in Q1.
As of the end of 2017 Q2, trust compensation provision was 221.81 billion Yuan, roughly flat with 19.54 billion Yuan in 2017 Q1, increasing by 21.36% (or 3.45 billion Yuan) y-o-y from16.13 billion Yuan.
C. Projects at risk
At of 2017 Q2, 581 projects in trust industry were at risk with a scale of 138.11 billion Yuan. The number of the projects at risk increased by 20 m-o-m from 561, and the scale of that increased by 15.41 billion Yuan from 122.70 billion Yuan. Among those risk projects, the amount of collective pecuniary trusts was 63.30 billion Yuan, accounting for 45.83% of total; and the amount of single pecuniary trusts were 73.68 billion Yuan, accounting for 53.35% of total. At of 2017 Q2，trust assets reached 23.14 trillion Yuan, and non-performing rate was 0.60%, almost equally to 0.56% in Q1.With the steady growth of trust assets, the risk of trust assets has been going downward since 2016 Q3.
II. Trust industry with stable performance and momentum
A. Business performance
In 2017 Q2, operating income in trust industry reached 28.10 billion Yuan, increased by 6.42 billion Yuan from 21.68 billion Yuan in Q1, the m-o-m growth rate also reached 29.62%. The income was close to 28.1 billion Yuan in 2016 Q2, mainly because of a slight decline in interest income.
In 2017 Q2, business income reached 19.47 billion Yuan, increased by 16.21 billion Yuan m-o-m, and the growth rate reached 21.52%; the y-o-y growth rate reached 6.66% from 18.25 billion Yuan, indeed showing a steady growth in operating income. The operating income to total income was 69.28% , declined slightly from 73.90% in Q1. Since the economic growth was better than expected, in 2017 Q2 investment income reached 6.15 billion Yuan, went down by 0.58% from 6.19 billion Yuan in the same period of the last year, and increased by 64.36% m-o-m from 3.74 billion Yuan; and it accounted for 21.89% of operating income in Q2. Interest income amounted to 1.61 billion Yuan, decreased by 3.93% m-o-m, and the proportion of that was 5.74% in Q2, a little higher than 5.67% in Q1.
In 2017 Q2 profits of trust industry reached 20.48 billion Yuan, increased by 5.04% y-o-y from 19.94 billion Yuan and increased by 34.83% m-o-m.
B. Performance as trustees
In June 2017, 1415 trust projects were liquidated, and the real annualized return rate for beneficiaries was 7.01%, 2 percentage points higher than that of the previous quarter. The average real annualized fee rate to trustees was 0.51%, almost the same at the end of Q1. At present new economic momentums act as a new driving force, the yield of trust product has entered a steady upward track.
III. Significant progresses in business transformation
A. Continually expanding proportion of non-discretionary management trusts
Since 2015 Q3, the proportion of non-discretionary management trusts has shown a rapid upward trend, and that of both investment trusts and financing trusts are on the downward slide.
As of 2017 Q2, the scale of financing trusts reached 4.49 trillion Yuan, increased by 9.67% y-o-y from 4.09 trillion Yuan. Compared with 33.86%, the y-o-y growth rate of trust assets in Q2, the growth rate of financing trust was relatively low, which was a reflection of the continuous progress of the trust industry transformation. The proportion of financing trusts fell from 47.76% in 2013 Q4 to 43.94% in, 2014 Q1, and further fell to 23.68% in 2016 Q2 and to 19.40% in 2017 Q2.In the past three and a half years, it had plumped by 28 percentage points. The scale of investment trusts reached 6.17 trillion Yuan, increased by 7.81% y-o-y from 5.73 trillion Yuan. The proportion of that was 26.68% in 2017 Q2, decreased by 6.45% y-o-y from 33.13%.
As of 2017 Q2, the scale of non- discretionary management trusts reached 12.48 trillion Yuan, increased by 67.11% y-o-y from 0.75 billion Yuan, and increased by 8.68% m-o-m from11.48 trillion Yuan; and the proportion of that was 53.92%, 10 percentage points higher than 43.20% in 2016 Q2.
B. Sources of trust funds
As of 2017 Q2, the scale of collective pecuniary trusts reached 8.52 trillion Yuan, accounting for 36.82% of total funding; that of single pecuniary trusts reached 11.11 trillion, accounting for 48% of total ;and that of property trusts was 3.51 trillion Yuan, accounting for 15.18% of total, 4 percentage points higher than that in 2016 Q2.
By 2016 Q4, the single pecuniary trusts mainly serving for institutional clients accounted for more than 50%. By the end of 2017 Q2, the proportion of that fell significantly by 8 percentage points y-o-y from 56.06%. Meanwhile, the proportion of collective pecuniary trusts increased by by around 4 percentage points, so did the proportion of the property trust.
The average expected yield of collective capital trusts established in June gained by 0.08 percentage point m-o-m to 6.63%. The market performance was positive and expected to go upward in the future.
C. Optimizing the demand structure of trust funds
As of 2017 Q2, investments into industrial and commercial enterprises amounted to 5.15 trillion Yuan, increased by 42.18% y-o-y from 3.62 trillion Yuan, and increased by 426.16 billion Yuan m-o-m with the fastest growth pace in the five major sectors. The proportion of investments into industrial and commercial enterprises accounted for 26.24% of total, 2.6 percentage points higher than 23.64% in 2016 Q2. The proportion of that was 24.82% in 2016 Q4 and 25.28% in 2017 Q1.
Investments into financial institutions amounted to 3.87 trillion Yuan, increased by 29.03% y-o-y from 3 trillion Yuan, and increased by 426.16 billion Yuan m-o-m. It accounted to 19.99% in 2017 Q1 and 19.71% in Q2, which remained relatively stable.
Investments into infrastructures amounted to 3.10 trillion Yuan, increased by 17% y-o-y from 2.65 trillion Yuan, and increased by 4.40% on a quarterly basis from 2.97 trillion Yuan in 2017 Q1, which accounted for 15.82% in 2017 Q2, close to 15.91% in 2017 Q1. Due to the enlarging amount of PPP projects targeting the basic industry and 3 trillion Yuan local debts to be issued in the second half of 2017, investments into infrastructures and its proportion will be in an upward trend.
Investments into securities market amounted to 2.81 trillion Yuan, increased by 4.13% y-o-y from 2.70 trillion Yuan, but decreased by 2.12% on a quarterly basis from 2.87 trillion Yuan in 2017 Q1. On the one hand, the amount of trust products increased slightly in Q2. On the other hand, since expectation of investments in bond market improved and funds flew into it, the scale of trusts business only decreased mildly.
Investments into real estate industry were1.77 trillion Yuan and its proportion rose mildly to 9.02% from 8.43% in 2017 Q1. However, under the mounting pressure of governmental control in real estate market, potential growth of trusts targeting real estate industry will shrink in the future; and more investments will go to equity financing, operating investment into commercial real estate and ABS trust.
IV. Ensuring the steady development in trust industry
Under the guidance of supply-side structural reform, the aggregate demand will be moderately expanded, the quality and the efficiency of economy will be constantly promoted, the significant adjustment in the structure of economy will be achieved, and the positive trend from the first half of 2017 will be consistently maintained. To this end, trust industry should always keep pace with the overall economic development, business innovation aiming at reduction of the cost in the real economy should be explored, and the transformation of the whole industry should be accelerated.
As a trend, the trust company should analyze the change in asset demand while focusing on funding and business, and build a more diversified product system to meet the real economy’s needs for finance. A dynamic economy in China provides a broad space for transformation and innovation of trust industry.
At this stage, the economy is in its transition from a relatively downward cycle to a new rising cycle, the trust industry as a whole is going through transformation and the supervision is tightening. The trust company should seize the market opportunities brought by the multiple environmental changes; extricating itself from the path dependence on so called “channel business”, providing more financial support to emerging industries. As long as the trust company can find its market position and focus on specialization, it can return to its origin and enhance its performance.