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Eastern Trusts, Western Contracts: The Transition from Contract to Trust in China’s Trust Industry

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Abstract

This article examines the intersection of law and finance in the historical development (since 1979) of the concept of trust in China. Compared to the Western model, two key aspects of the Chinese trust remain to be determined, namely: the allocation of the ownership of the trust property and the scope of the beneficial right. Recent attempts by the Chinese legislators to clarify the Trust Law 2001 have led some scholars to speak of ‘one law, three regulations’. However, this article argues that the present situation, in which a trust is treated as a two-party contract between settlor/beneficiary and trustee, has proved useful in allowing China’s trust industry to continue to grow, while providing an important source of funding for state and local government projects. Drawing on the Legal Theory of Finance, this article argues that the Chinese legislators have built the possibility for flexible enforcement into the Trust Law 2001 and its subsequent interpretation in order to encourage investment, while permitting a stable transition from a ‘rule-bound’ to a ‘law-bound’ system, in accordance with the Chinese principle of ‘crossing the river by feeling the stones’. In the next phase, the practice of ‘absolute payment’ (刚性兑付), which is just beginning to receive scholarly attention, will present a potential threat to financial stability as China’s trust industry moves towards a tighter definition of trust.

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Notes

  1. Hsu and Li (2015), at p. 5.

  2. Lin et al. (2013), at p. 467.

  3. Meng (2015), at p. 492.

  4. Du et al. (2013), at p. 743.

  5. Ibid.

  6. See, for example, Lee (2009).

  7. Pistor (2013a), at pp. 321–324.

  8. See Allen (2005).

  9. Pistor (2013a), at p. 320.

  10. In a recent paper, Dan Awrey concluded that ‘[t]he stronger [the] laws and legal institutions’ imposed, ‘the more powerful the incentives of market participants to find innovative ways of contracting around them’. He views wealth management products (WMPs) as a ‘private contractual response to changes in the constraints imposed by various forms of public regulatory intervention’ which are ‘designed to occupy the negative legal space’ created by regulation elsewhere in the market. Awrey (2014), at p. 38.

  11. Tan (2005), at pp. 55–56.

  12. Kumar et al. (1997), at p. 24.

  13. Ibid.

  14. Ibid, at p. 2.

  15. Lin et al. (2013), at p. 467.

  16. Kumar et al. (1997), at p. 26.

  17. Ibid.

  18. Ibid, at p. 3. By way of comparison to the US: ‘The first trust company, according to one source, was the Farmer’s Fire Insurance and Loan Co., established in 1822.’ Rockoff (2000), at p. 677.

  19. Kumar et al. (1997), at p. 1.

  20. Lee (2009), at p. 655.

  21. Ibid.

  22. Zhou (2014).

  23. Li (2015).

  24. Ho et al. note that ‘where the Chinese Trust Law is silent, the Chinese court has had no hesitation in invoking the Law of Contract of the People’s Republic of China to fill the gap, even if the contractual provision may not be the most appropriate in a trust setting’, giving the example of Yanxin Co. Ltd v. Huabao Trust and Investment Co. Ltd, Ho et al. (2013), at p. 83.

  25. Tensmeyer (2015), at p. 740.

  26. Kumar et al. (1997), at pp. 1–2.

  27. Shen (2013), at p. 22.

  28. ‘Shadow banks conduct credit, maturity and liquidity transformation similar to traditional banks. However, what distinguishes shadow banks from traditional banks is their lack of access to public sources of liquidity.’ Pozsar et al. (2012), at p. 2.

  29. Guo and Xia (2014), at p. 409.

  30. Hong and Yan (1997), at p. 8.

  31. Ibid.

  32. Wang (2010): ‘作为金融工具的信托在中国广泛开展, 各省、 各部委都设信托公司, 但是, 信托公司缺乏必要的监管, 产生了严重的问题, 许多信托公司倒闭破产, 社会影响恶劣, 需要对信托公司进行整顿’.

  33. Wang (2014), at p. 100.

  34. Chang (1999), at p. 44.

  35. Walter and Howie (2012), at p. 41.

  36. Hansmann and Mattei (1998), at p. 438.

  37. Meng (2015), at p. 493.

  38. Lee (2009), at p. 668.

  39. Pistor (2013a), at p. 325.

  40. Art. 2, Trust Law 2001 (信托法; promulgated by Order No. 50 of the President of the PRC on 28 April 2001): ‘委托人基于对受托人的信任, 将其财产权委托给受托人’.

  41. Commission of Legislative Affairs of the NPC Standing Committee (全国人民代表大会常务委员会法制工作委员会), Statutory Interpretation of the PRC Trust Law (中华人民共和国信托法释义), ed. Yaowu Bian (卞耀武), published online 14 November 2003 at http://www.npc.gov.cn/npc/flsyywd/jingji/node_2210.htm. Accessed 8 November 2014.

  42. Beijing Haidian Science & Technology Development Co. Ltd v. Shenzhen Xinhua Jinyuan Investment Development Co. Ltd and others, Yu Gao Fa Min Chu Zhi Case No. 14 (渝高法民初字第14号, 2006): ‘本院认为, 在信托法律关系内部, 注重的不是信托财产的归属, 而是由信托文件或由法律规定的各方当事人的权利义务, 信托财产的所有权由谁享有, 对当事人之间的权利义务没有实质性影响’.

  43. Beijing Haidian v. Shenzhen Xinhua Jinyuan: ‘委托人在设立信托时是将信托财产权 “委托” 给受托人, 而不是“移转”给受托人’.

  44. Beijing Haidian v. Shenzhen Xinhua Jinyuan:

  45. Pistor (2013a), at p. 323.

  46. Gao (2014), at p. 353.

  47. Ho et al. (2013), at p. 88.

  48. For the argument, see Zhao and Wang (2007):’立法的直接目的无疑是刻意避免信托在英美法中的双重所有权问题’.

  49. For this view, see Gao (2014), at p. 353.

  50. Statutory Interpretation, I.1.i: ‘信托的理论阐述是丰富的, 有不同的见解, 如: 债权论、物权论、管理权论、风险论或者债权物权结合论等’.

  51. Statutory Interpretation, Art. 44: ‘受益人所享有的信托受益权作为私法上的一种权利, 到底为何种性质, 至今众说不一’.

  52. Pistor (2013a), at p. 323.

  53. Gao (2014), at pp. 353 and 350.

  54. Pistor (2013a), at p. 320.

  55. Ibid, at p. 323.

  56. Pistor (2013b).

  57. Wang (2014), at p. 98.

  58. Lee (2009), at pp. 668–669.

  59. Ibid, at p. 662.

  60. Ho et al. (2013), at p. 93.

  61. Gao (2014), at p. 351.

  62. Ho et al. (2013), at p. 85.

  63. Gao (2014), at p. 357.

  64. Lee (2009), at pp. 668–669.

  65. Ibid, at p. 662.

  66. See Fu (2013) and Gao (2015), at p. 55.

  67. Measures for the Administration of Trust Companies’ Trust Plans of Assembled Funds (2007), CBRC, Art. 2. Online: http://www.lawinfochina.com/display.aspx?lib=law&id=5883&CGid. Last accessed 5 July 2015.

  68. McCabe (2010), at p. 8.

  69. Notice of China Banking Regulatory Commission Concerning Relevant Issues on Further Regulating Trust Business of Assembled Funds (中国银行业监督管理委员会关于进一步规范集合资金信托业务有关问题), CBRC Document No. 91 (银监发[2004]91号文), Paragraph 20, (各银监局应当…对连续两个到期集合信托计划的信托本金出现损失且应由信托投资公司承担责任的…暂停其集合资金信托业务资格2年…). Online: http://www.cbrc.gov.cn/chinese/home/docDOC_ReadView/1077.html. Last accessed 8 July 2015.

  70. This conception of norms draws on the recent paper published by Haar (2014).

  71. For the effect of the hierarchy on the financial system that ‘actors will seek to position themselves strategically towards the apex of the domestic or global system where they are most likely to benefit from another lifeline’, see Pistor (2013a), at p. 325.

  72. McAdams and Rasmusen (2007), at p. 1577.

  73. Meng (2015), at p. 499.

  74. The ‘implicit guarantee’ underlying these products is also questionable at best. Recent defaults by shadow banking products have resulted in bail-outs by trust companies, local governments and third-party investors. Online: http://www.manulifeam.com/hk/Research-and-Insights/Documents/China-s-shadow-banking-system/‬‬‬‬‬‬. Last accessed 3 July 2015‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬

  75. Supra n. 67, Art. 8(1).

  76. Guiding Opinions of CBRC General Office for Trust Companies on Risk Control (中国银监会办公厅关于信托公司风险监管的指导意见), CBRC Document No. 99 (银监办发[2014]99号), Paragraph 2.2.3 (加强投资者风险教育, 增强投资者“买者自负”意识). Online: http://www.cbrc.gov.cn/govView_69DB963082914C498028012863245973.html. Last accessed 9 July 2015.

  77. Guo and Xia note, in the comparable case of Document No. 107, issued by the General Office of the State Council, that ‘[i]n theory, the legally binding effect of such administrative normative documents is debatable, but in practice, they have often served as new regulations and have been enforced accordingly’. Guo and Xia (2014), at p. 410.

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Acknowledgments

I gratefully acknowledge research support from the Center of Excellence SAFE, funded by the State of Hessen initiative for research LOEWE.

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  1. Doctorate/PhD Program in Law and Economics of Money and Finance, Goethe University Frankfurt, Frankfurt/M., Germany

    Christopher Hsu

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Christopher Hsu: Doctoral Candidate

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Hsu, C. Eastern Trusts, Western Contracts: The Transition from Contract to Trust in China’s Trust Industry. Eur Bus Org Law Rev 17, 173–193 (2016). https://doi.org/10.1007/s40804-016-0033-3

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