Xia Bin& Chen Daofu, Research Institute of Finance of DRC Research Report No.086, 2005

I. Main Development Trend of Financial Sector in China: Joint Competition in Assets Management Business

The assets management business is a specialized business of financial institutions aimed at increasing the value of assets of fund suppliers in the financial market. Demand for such business will increase along with the growing strength of the national economy. In particular, three major trends emerged in the economy in recent years determined the growing urgency of such demand. The first trend is the room for arbitrage expanded along with the deepening of financial market and the growing variety of financial products. The second trend is that interest rates have become negative from time to time with the domination of indirect financing with control over interest rates and looming inflation pressure. The third trend is the expansion of the gap between rich and poor and the concentration of wealth. Along with the increase in private assets, their sensitivity to interest rates will increase and demand for higher profits will become stronger. In terms of financial management, however, individualshave become more and more unable to adapt to the ever-developing market, and urgently need specialized assets management institutions to manage their huge personal financial assets.

From the perspective of institutional fund suppliers,the idling assetsare growing along with the expansion of enterprise scale and rising profits. In 2004, enterprise deposits reached RMB8.94 trillion, while various insurance funds emerged one after another and continued to expand as a result of the social insurance system reform and development of the insurance sector. In 2004, total operational capital of the insurance sector reached RMB1.1 trillion, while social insurance funds also rose to RMB430 billion.

In the mean time, the Chinese economy continued its rapid growth. The long-term rapid development of the national economy cried out for capital support. When the existing financing pattern suffers from low efficiency and restrictions, it is imperative for the assets management business of intermediate institutions to emerge and take their chances.

Against this general backdrop, commercial banks had to endure capital restrictions on the one hand by shrinking their lending business, developing intermediate agency business and increasing agency incomes so as to keep their clients. On the other hand, as regulations of China Banking Regulatory Commission permitted them to engage in such business, they inevitably tried to grab their shares of the assets management market. At present, the main products of banks include agency lending (especially multi-party agency lending); individual assets management schemes, structural deposits in foreign exchange, and business with agency and assets management natures introduced by the assets management offices of various banks such as fixed-term and fix-amount fund purchases as well as account management.

As competition intensified among security companies, brokerage profits stayed low after brokerage commissions were opened up, leading to fiercer competition in the investment banking businesses. As a result, security companies will inevitably join the competition in the assets management market. Meanwhile, relevant stipulations of China Securities Regulatory Commission also encouraged financial innovations. At present, assets management businesses of security companies mainly include one-to-one assets management business and many-to-one aggregate assets management businesses.

Fund management companies are financial institutions specialized in assets management business. At present, except for introducing various publicly raised funds, some fund management companies are engaged in one-to-one assets management business as assets management agencies of the social insurance fund, and some are allowed to manage enterprise annuities. Meanwhile, these fund management companies are also vigorously trying to engage in assets management business for private assets.

Along with the rapid growth of premium incomes, comprehensive operation and assets management business of the insurance sector will follow the development trend of international issuance sector. At present, insurance companies in China have already introduced various joint insurance products for investment and dividends and are competing to snatch their shares in the assets management market. Some insurance groups have even established their own assets management companies particularly engaged in managing investment assets of insurance funds.

Trust companies are financial institutions more specialized in assets management business. At present, except for very few trust businesses with the nature of public welfare, most of their businesses overlap with other financial institutions.

The above analysis demonstrates that in a very long time to come, the Chinese economy will have a strong demand for assets management business in the fund supply to fund demand channel, and all financial institutions will compete to snatch assets management business to upgrade their management level. Since the assets management business is basically allowed by the current laws and regulations, it is obvious that competition of various financial institutions in this business will become the major trend of the financial sector development in China.

II. Comparison of Characteristics of Various Financial Institutions in their Competition for AssetsManagement Business

Although various financial institutions in China are already engaged in and competing with each other extensively in the same assets management business, and their operational mechanism and supervision concepts are generally the same, analysis shows that their legal basis, operational features and supervision requirements are not consistent with each other. There have always been disputes as to whether all such businesses belong to trust business. Some supervision agencies have avoided the existing disputes. Over the past three years, the coauthors have made many suggestions to unify the legal stipulations and unify the rules of the game to prevent financial risks. However, the competition situation at present still remains disorderly and chaotic.

What is trust? Among the five lawsof the Security Law, the Bank Law, the Insurance Law, the Capital Fund Law and the Trust Law, people in legal circles all recognize that the Trust Law is forward-looking, most close to international practice, and reflects the rules of the market economy to the greatest extent. Therefore, in spite of an increasing variety and rising level of economic activities in the Chinese market, the Trust Law is still able to accommodate changes for a long time to come, and no one has ever called for any amendmentsor supplementations for this law as for the other four laws. According to the definition of the Trust Law, "Trust is an act wherein the trustor puts the assets in the trust of the trustee based on the trust of the trustor in the trustee, so that the trustee may manage or dispose of the assets of the trustor according to the will of the trustor in the name of the trustee for the interest of the trustor or specific purpose." Based on the definition of the Trust Law, the act of trust has three essential characteristics:

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* This article was a speech made at the conference on the establishment of China Trust Sector Association on May 14, 2005.