The Impact Of Trust Beneficiary Protection On The Development Of Chinese Trust Corporations

In the last decade,the trust industry in China have been developing rapidly and raised from an insignificant fringing corner to the center stage of the financial industry in China,becoming the second largest financial industry sector after banking.Unlike in most western countries,in which trust is a legal institutional relationship,trust industry in China has become an independent financial sector.Up until Dec 30,2015,the total trust asset size of the trust industry in China has reached 1630 billion Yuan with a total owner’s equity of 381.87 billion Yuan.Ten year ago,the total trust assest size was merely 204.6 billion Yuan.Th e trust industry in China have expanded nearly 80 times during the past decade,with the sector leverage ratio of up to 42.68.This rapid expansion also implies that during the period in which China economy slows down,the trust industry can become an impo rtant source of financial pressure.The legal regulation of trust industry in China have been lacking,this leads to a lack of comprehensiveness and flexibility in the regulations,consequently,this causes a dilemma for the regulatory bodies of China tha t trust companies become fragile to their regulative actions,but also can grow unrestricted if the regulatory actions are alleviated.Another viable way to ensure the proper development of trust industry is to ensure the rights of the trust beneficiaries by proper legislation and regulatory actions.Trust beneficiary is an important party in the trust relationship and when properly executed,beneficiary right protection provides a way to keep the trust companies under constant check.In this thesis,it is hypothesized that from a theoretical point of view,increasing legal protection for trust beneficiaries’ rights can reduce the information asymmetry between trust investors and trust companies,which effective reduces the principal-agent problem that arises between the beneficiary,trust company and trust assets manager.This also helps to improve the investment efficiency of trust assets,a higher efficiency leads to better trust company performance,and as a result,more investors and further development of the trust industry.To validate this hypothesis,an indexing system is developed to quantify the level of trust beneficiary protection provided by legal system in China,between 2001-2016.In order to sidestep the potential endogeneity issue in the mode l,the quality of information disclosure by trust companies is used as an instrument variable.Empirical examination is performed over the model on three levels,namely trust investment efficiency,trust company performance and trust company risk taking.M ixed effect,fixed effect,Two Stage Least Square and System GMM methods are used on the regression.The test results indicate that the relationship between degree of trust beneficiary protection and trust investment efficiency shows an inversed “U” shape.Initialization of improvement of legal protection to trust beneficiaries can significantly boost trust investment efficiency,however,this boost decreases with time and incidence;when a comprehensive legal protection is provided to the trust beneficiari es,the balance between beneficiaries and trust company reaches an optimum,further increasing of legal protection(excessive protection)would introduce excessive interference to the trust companies from beneficiaries,which can negatively influence the j udgement and decisions made by the trust asset managers.An inversed U shape relationship is also seen between trust beneficiary protection and trust company performance.A lag is observed compared to the influence of beneficiary protection over investment efficiency.Given all other conditions identical,increased protection of trust beneficiaries can inhibit the risk taking of trust companies.Regional legal environment can impact the execution of legal protection of the trust beneficiaries.In a good regional legal environment,a stronger effect is seen in the inhibition of beneficiary protection to company risk taking.Meanwhile,other conclusions of this thesis also includes: There is a significantly negative relationship between the total managed trust asset size and trust investment efficiency,it indicates that a trust company’s effectiveness and ability to operate trust assets is not necessarily indicated by the company’s size;Increasing the portion of Independent directors in the board of directors have a positive effect on the performance of the trust company.Increasing non-performing ratio reduces the performance of a trust company.Also a negative relationship is observed between the portion of state owned equity and trust company risk taking.Based on the above analysis and examination conclusions,it is proposed that it is beneficial to properly increase the legal protection of trust beneficiaries,increase legal requirements for the information disclosure of trust companies and optimize the ownership structure of trust companies;Five suggestions for regulatory policies intended to improve the legal environment of regions are propsed.The author hopes that by making and passing a comprehensive Trust Law and following necessary recommendation articulated in this thesis,the trust industry in China can keep developing steadily.