Inside sources said that Shanghai could see the first group of five trust and investment companies (TICs) re-licenced by year end.

Among the five, two are the locally-established Shanghai International Trust and Investment Corp (SITICO), which used to be the local government's fund-raising and investment arm, and the Shanghai AJ TIC, a privately-invested financial organization.

The other three include Huabao, which is affiliated with Shanghai Baosteel, the CAOOC Citic Joint Venture, and the Xinjiang Jinxin TIC, a company formerly established in Northwest China's Xinjiang Uygur Autonomous Region but now moved to Shanghai.

"Those companies have reduced commercial banking businesses they formerly engaged in and substantially reduced their international loans," said Li Xianpu, a Shanghai-based lawyer and TIC consultant.

More importantly, those TICs formerly merged with securities departments will separate from the investment arms.

"This will reassure customers, especially international customers, since experiences in past years proved that TICs involved in stock trading contributed to high losses and risks," Li said.

Serial collapse

Trust and investment companies (TICs), usually the fund-raising and investment arms for city, provincial and central government, were considered the weakest part of China's finance sector.

Bloomberg, Reuters and other international media once wrote that the trust industry in China experienced a crisis of confidence after Guangdong International TIC (GITIC) collapsed in 1998, unable to pay its 28 billion yuan (US$3.38 billion) international loans, mainly to Japanese banks.

GITIC was later liquidated by Guangdong provincial government, which established the company.

The government promised to pay back the loans GITIC owed to international lenders step by step, according to State media reports after the liquidation.

GITIC's case was followed later by the collapse of Hainan ITIC, Dalian ITIC and Tianjin ITIC.

"The reason these incidents happened is that we didn't have proper laws to regulate the market," said Ma Jianping, general manager of Shanghai AJ TIC, the second largest TIC in Shanghai. "Seldom do people in TICs really know what trust investment is."

Li echoed Ma's opinion, saying he believed that almost all 240 TICs in China, which started in the early 1980s, were not engaged in trust business in its real sense.

About half of them broke rules while engaged in non-trust business, he said.

Some TICs engaged in illegal activities such as accepting deposits from individuals. Many of them issued international bonds without approval from the central authorities.

Rectification

After the collapse of GITIC, the central bank launched the 6th rectification campaign to restructure the industry.

This time, the government is determined.

The central bank implemented rules for the trust industry in January. Also the Trust Law, formulated by National People's Congress in April, will be put into operation in October.

According to the new rules issued by the central bank and the Trust Law, new products can only be launched by TICs after a risk evaluation by a panel of experts assembled by the central bank. The bank must give final approval.

Also, trust investment and securities trading must be separated, providing legal protection for trustees' money if TICs declare bankruptcy.

Using its new oversight power, the central bank will close some poorly-performing TICs and merge the remainder of the original 240 into about 50 new ones.

"After such strict rectification, I believe the remaining companies will be more competitive," said Li Huizhen, deputy general manager of the Shanghai International Trust and Investment Company (SITICO), the largest trust company in Shanghai.

So far, SITICO and Shanghai AJ have reduced their international loans from US$4 billion and US$50 million in 1998 to US$50 million and US$20 million respectively.

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