Originally published 24 December 2010

Keywords: CBRC, PRC trust companies, internal audit

Background

Real estate related investment products offered by PRC trust companies have become an increasingly important alternative source of capital for real estate developers to finance construction costs where other traditional sources of real estate finance have been constrained by central government policies impacting on the real estate sector.

The China Banking Regulatory Commission (CBRC), the regulator of PRC trust companies, issued Circular on Risk Warning for Real Estate Trust Business of Trust Companies (Circular) on 12 November 2010, with a view to initiating an urgent review of the risk controls with respect to real estate trust projects.

Internal Audit

The Circular directed all PRC trust companies to undertake an internal audit of their real estate trust projects as a priority matter.

The analysis of each real estate project has to address the following issues:

  • Are the 'four certificates' i.e. the Land Use Right Certificate, Project Land Use Permit, Construction Project Planning Permit and Construction Commencement Permit, in place?
  • Does the real estate developer hold a class II certificate?
  • What is the source of the minimum capital required from the real estate developer (i.e. 50% of the total investment) to complete the real estate project?
  • What is the source of the first repayment to the trust company?
  • Are the mortgage, pledge and other guarantee measures adequate?
  • What risk management plans have been devised?

CBRC Audit and Inspection

The Circular requires CBRC's local offices to strengthen their supervision of the compliance and risk control measures adopted by PRC trust companies. It requires CBRC local offices to assess each real estate trust product, based on the internal audit of the trust companies.

Trust companies are required to cure any problem discovered during the audit and inspection process. Penalties may be imposed for any violations. All CBRC offices were required to report the result of the inspections, and any penalties imposed, to CBRC on or before 20 December 2010.

CBRC Directives

The CBRC local offices are also required to urge trust companies to:

  • Exercise due diligence in selecting partners when conducting real estate trust business
  • Moderate growth and expansion
  • Strengthen the supervision and control of the disbursement of trust funds
  • Strictly control the grant of multiple loans to large-scale real estate groups in order to guard against potential risks in the real estate market.

Potential Implications

The Circular intends to ensure that PRC trust companies have adequate measures in place to guard against the inherent risks of providing finance for real estate projects.

This will inevitably impact on or delay the issuance of real estate trust products.

Please see an earlier update entitled PRC Trust Companies: An Alternative RMB Fundraising Platform.

Learn more about our PRC offices, Financial Services Regulatory & Enforcement, Insurance & Reinsurance, Private Equity / Venture Capital, Private Investment Fund and Real Estate practices.

Visit us at www.mayerbrownjsm.com

Copyright 2011. JSM, Mayer Brown International LLP and/or Mayer Brown LLP. All rights reserved. Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: JSM, a Hong Kong partnership, and its associated entities in Asia; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and Mayer Brown LLP, a limited liability partnership established in the United States. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.