Even as several major Western banks have sold stakes in Chinese state-owned banks, another group of foreign lenders has invested in a separate part of China's financial industry: the trust companies that serve big investors.
JPMorgan Chase & Co. (JPM) became the latest Western bank to invest in a Chinese trust company this week, taking a 19.9% stake in midsized Bridge Trust Co. for an undisclosed amount.
Chinese trust companies, which serve some of the same role as asset managers in Western economies, provide a platform for creative ways to attract and keep wealthy Chinese savers as well as to lend to companies. They have grown rapidly in recent years as newly wealthy investors, tired of putting their money in China's volatile stock market or low-yielding bank deposits, pushed assets at these firms to more than 4.8 trillion yuan, or about $760 billion, at the end of 2011, up 37% from a year earlier, according to data from the China Trustee Association.
JPMorgan joins a growing group of foreign players that have bought into trust companies, including Barclays PLC (BCS), Macquarie Group Ltd. (MQBKY), Royal Bank of Scotland Group PLC (RBS), Bank of East Asia Ltd. (BKEAY) and, most recently, Bank of Montreal (BMO).
The increased interest comes as some of the world's biggest banks sell their stakes in China's state-owned banks. Goldman Sachs (GS) has been steadily paring its stake in Industrial & Commercial Bank of China Ltd. (IDCBY), while Bank of America Corp. (BAC) halved its stake in China Construction Bank Corp. (CICHY) last year. Citigroup Inc. (C) sold all of its remaining stake in Shanghai Pudong Development Bank Co. this week.
Now, foreign banks, seeking new ways to grow in China, are making unconventional investments. Last week Standard Chartered PLC (SNTDF) and UBS AG (UBS), together with Hong Kong-based private-equity fund Citic Capital, paid 5.37 billion yuan for a 8.5% stake in China Cinda Asset Management Co., a firm whose core business is the disposal of nonperforming loans from China's banks.
And in November, JPMorgan agreed to invest about $200 million to help set up a financial company that will guarantee loans to small Chinese firms, an area that traditionally has struggled to get access to credit from the country's banks. According to a person close to the deal at the time, JPMorgan's investment will give it a 24.9% stake in the new firm.
Perhaps the biggest move, however, is into trusts, which are allowed to offer a wider range of services than banks, securities companies or insurance firms, the areas of the economy where foreign firms have traditionally invested.
Bridge Trust is based in Zhengzhou, in Henan Province in eastern China, roughly 400 miles south of Beijing and one of the country's most populous provinces, with about 100 million residents. It is majority owned by a state-controlled company, China Power Investment Financial Co.
People with knowledge of the deal said JPMorgan believes the trust sector's fast growth and reputation for financial innovation could yield opportunities in the future. They said the bank will provide technical and management advice to the trust but won't have a management role. Unlike other banks that hope to use their investment in trust companies to help meet the needs of wealthy clients, JPMorgan doesn't have high-net-worth customers in China.
The deal requires approval from the China Banking Regulatory Commission, which is expected in the second quarter. Foreign investment in China's trust companies is limited to 20%.
Trusts take cash from companies and wealthy individuals and place it in a wide range of investments. They aren't on the hook if the investments don't pan out, although the regulator has asked them to hold more capital against certain types of risky assets.
But trusts have also used their relative freedom of operation to pile into areas that have worked counter to the interests of the regulator. As China's central bank tried to exit its post-financial crisis stimulus and tighten monetary conditions, banks circumvented lending restrictions by using trusts to move their loans off their balance sheets. The result was that credit actually expanded in 2010 from a year earlier.
The banking regulator, which assumes primary responsibility for overseeing the trusts, has since imposed capital requirements on them and instructed them to get out of certain types of investments.
