Ownership of Trust Property in China : A Comparative and Social Capital Perspective 978-981-10-5846-2, 9811058466, 978-981-10-5845-5

Table of contents :
Front Matter ....Pages i-xv
Introduction (Zhen Meng)....Pages 1-11
Trust Law of China and Its Uncertainty Regarding the Location of Ownership of Trust Property (Zhen Meng)....Pages 13-35
“Dual Ownership” Versus “Absolute Ownership”: A Comparative Analysis (Zhen Meng)....Pages 37-75
Social Capital, Trust, and Guanxi (关系) (Zhen Meng)....Pages 77-102
An Empirical Study on China Trust Industry: Methods (Zhen Meng)....Pages 103-117
Current Trust Industry in China: A Dense Network (Zhen Meng)....Pages 119-133
The Chinese Trust Industry in the Near Future Towards a Sparse Network: From Guanxi to Institutionalized Trust? (Zhen Meng)....Pages 135-157
Conclusion (Zhen Meng)....Pages 159-164
Back Matter ....Pages 165-171

Citation preview

Perspectives in Law, Business and Innovation

Zhen Meng

Ownership of Trust Property in China A Comparative and Social Capital Perspective

Perspectives in Law, Business and Innovation Series editor Toshiyuki Kono, Kyushu University, Fukuoka, Japan Editorial Board Erik P.M. Vermeulen, Tilburg University & Philips Lighting, Eindhoven, The Netherlands Claire Hill, University of Minnesota Law School, Minneapolis, USA Wulf Kaal, University of St. Thomas, Minneapolis, USA Ylber A. Dauti, The Dauti Law Firm, PC, New York, USA Pedro de Miguel Asensio, Complutense University of Madrid, Spain Nikolaus Forgo, Hannover University, Germany Shinto Teramoto, Kyushu University, Fukuoka, Japan

Over the last three decades, interconnected processes of globalization and rapid technological change—particularly, the emergence of networked technologies— have profoundly disrupted traditional models of business organization. This economic transformation has created multiple new opportunities for the emergence of alternate business forms, and disruptive innovation has become one of the major driving forces in the contemporary economy. Moreover, in the context of globalization, the innovation space increasingly takes on a global character. The main stakeholders—innovators, entrepreneurs and investors—now have an unprecedented degree of mobility in pursuing economic opportunities wherever they arise. As such, frictionless movement of goods, workers, services, and capital is becoming the “new normal”. This new economic and social reality has created multiple regulatory challenges for policymakers as they struggle to come to terms with the rapid pace of these social and economic changes. Moreover, these challenges impact across multiple fields of both public and private law. Nevertheless, existing approaches within legal science often struggle to deal with innovation and its effects. Paralleling this shift in the economy, we can, therefore, see a similar process of disruption occurring within contemporary academia, as traditional approaches and disciplinary boundaries—both within and between disciplines—are being re-configured. Conventional notions of legal science are becoming increasingly obsolete or, at least, there is a need to develop alternative perspectives on the various regulatory challenges that are currently being created by the new innovation-driven global economy. The aim of this series is to provide a forum for the publication of cutting-edge research in the fields of innovation and the law from a Japanese and Asian perspective. The series will cut across the traditional sub-disciplines of legal studies but will be tied together by a focus on contemporary developments in an innovation-driven economy and will deepen our understanding of the various regulatory responses to these economic and social changes.

More information about this series at http://www.springer.com/series/15440

Zhen Meng

Ownership of Trust Property in China A Comparative and Social Capital Perspective

123

Zhen Meng Department of Law, School of Intellectual Property Nanjing University of Science and Technology Nanjing China

ISSN 2520-1875 ISSN 2520-1883 (electronic) Perspectives in Law, Business and Innovation ISBN 978-981-10-5845-5 ISBN 978-981-10-5846-2 (eBook) DOI 10.1007/978-981-10-5846-2 Library of Congress Control Number: 2017946659 © Springer Nature Singapore Pte Ltd. 2017 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Acknowledgements

I would like first to express my great appreciation to Prof. Shinto Teramoto in Kyushu University, who guides me to do legal research from a practical and sociological perspective. Throughout my Ph.D. study, I have learned so much from him about how to rigorously do research, how to break away from the conventional way of thinking, and how to practice critical thinking. Also, I am very grateful for the valuable academic advice from Associate Prof. Mark Fenwick in Kyushu University. His academic intelligence, inspiring advice, constant encouragement, and kindness has been of immerse help for this book. Further, I would like to thank Associate Professor Megumi Hara in Gakuen University. Her introduction of me to several well-known trust law scholars has been very helpful to my academic career. Finally, I feel very lucky that this book is included in the Perspectives in Law, Business and Innovation book series edited by Prof. Toshiyuki Kono. My very great gratitude also goes to China Scholarship Council for the financial support. This book would be not possible without the scholarship from the Chinese Government Graduate Student Overseas Study Program. This book is also supported by two Chinese funds: (1) the “Fundamental Research Funds for the Central Universities” No. 30916013117, and (2) the “Fundamental Research Funds for the Central Universities” No. AE15001_16. Last but not least, I consider myself incredibly fortunate to have a loving family. During the process of this book, my lovely son was born and has grown into an adorable toddler. It has been a challenging journey, and I am grateful for the constant courage he gave me. My husband has shown me how truly giving and caring a person can be. This book is dedicated to all of my family—my parents, husband, son, brothers, and grandparents. Their unconditional love, constant support, and encouragement crossed oceans to make this book possible.

v

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Background and Research Problem . . . . . . . . . . . . . . . 1.2 The Academic Debate on the Location of Ownership of Trust Property in China . . . . . . . . . . . . . . . . . . . . . . 1.3 Aim, Outline, and Methodology . . . . . . . . . . . . . . . . . . 1.4 Originality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2 Trust Law of China and Its Uncertainty Regarding the Location of Ownership of Trust Property . . . . . . . . . . . . . . . 2.1 Background of Chinese Trust Law . . . . . . . . . . . . . . . . . . . . . 2.1.1 The Development and Problems of Chinese Trust Business Before the Enactment of Trust Law . . . . . . . 2.1.2 The Necessity for Chinese Economy of Further Development of Chinese Trust Industry . . . . . . . . . . . 2.1.3 Trust Law as a Necessary Solution for the Problems of Chinese Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.4 The Legislative History of Chinese Trust Law . . . . . . 2.1.5 Modern Chinese Law Established on Civilian System 2.2 Difficulties for Civilian Lawyers to Understand the Common Law “Trust” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Trust Law: A Typical Common Law Construct . . . . . 2.2.2 Trend in the Reception of Trust All Over the World . 2.2.3 The Conflicts Between Common Law Trusts and Civil Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2.3 Significant Problem: Focusing on Article 2 of Chinese Trust Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Legal Uncertainty Regarding the Ownership of Trust Property in China . . . . . . . . . . . . . . . . . . . . . 2.3.2 Practical Problems Caused by Article 2 of Chinese Trust Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3 “Dual Ownership” Versus “Absolute Ownership”: A Comparative Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Conceptualization of “Dual Ownership” and “Absolute Ownership” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 The Development of the Concept of “Dual Ownership” in Common Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 The Concept of “Absolute Ownership” in the Civil Law Jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Debates Within Chinese Legal Circle Regarding Ownership of Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 An Opinion Contending Settlor as the Owner of Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 An Opinion Contending Trustee as the Owner of Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 An Opinion Contending Beneficiary as the Owner of Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.4 Other Minor Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Diverse Approaches to Decide the Location of the Ownership of Trust Property in Various Jurisdictions . . . . . . . . . . . . . . . . . . . 3.3.1 Trusts in Mixed Jurisdictions: Scotland, Quebec, Louisiana, South Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Trusts in East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Interim Conclusion and Limits of Existing Research . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Social Capital, Trust, and Guanxi (关系). . . . . . . . . . . . . . 4.1 Theoretical Background: Reviewing Social Capital . . . 4.1.1 Bourdieu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.2 Coleman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.3 Putnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.4 Nan Lin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.5 Application of the Concept of Social Capital to Academic Areas . . . . . . . . . . . . . . . . . . . . . .

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4.2 Substantial Value of Social Trust in Establishing Commercial Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 4.2.1 An Understanding of Trust: A Choice to Place Oneself at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 4.2.2 Role of Trust in Economic Growth . . . . . . . . . . . . . . . . . . . 89 4.2.3 Personal Trust Versus Institutionalized Trust . . . . . . . . . . . 91 4.3 Guanxi: An Unique Phenomena in China . . . . . . . . . . . . . . . . . . . . 92 4.3.1 The Notion of Guanxi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 4.3.2 Impacts of Guanxi on Chinese Business Culture . . . . . . . . . 93 4.4 Social Network Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 4.5 Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 4.6 Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 5 An 5.1 5.2 5.3

Empirical Study on China Trust Industry: Methods . . . . . . Empirical Research Questions. . . . . . . . . . . . . . . . . . . . . . . . . Empirical Research Methods . . . . . . . . . . . . . . . . . . . . . . . . . Source of Empirical Material—I: Documents . . . . . . . . . . . . . 5.3.1 Data from China Trust Association . . . . . . . . . . . . . . . 5.3.2 Reports on China’s Trust Industry . . . . . . . . . . . . . . . 5.4 Source of Empirical Material—II: Targeted In-Depth Interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 The Sampling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Selected Results of the Empirical Research . . . . . . . . . . . . . . 5.5.1 Chinese New Middle-Class Citizens Show Great Willingness to Invest into Real Estate Market . . . . . . . 5.5.2 High Net Worth Individuals in China Are Frustrated to Utilize Domestic Wealth Management Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.3 High Degree of Mutual Trust Between Clients and Commercial Banks in China . . . . . . . . . . . . . . . . . 5.5.4 Role of Guanxi in Chinese Trust Business . . . . . . . . . 5.5.5 Lack/Low Level of Trust of New Middle-Class Towards Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.6 The Nascent Transition of Chinese Trust Business . . . 5.6 Interim Conclusion and Limitations . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 Current Trust Industry in China: A Dense Network . . . . . . . . . 6.1 The Thriving Commercial Trust Business in China . . . . . . . . 6.2 The Functions of Trusts in China Today . . . . . . . . . . . . . . . . 6.2.1 Financing Tool for Cash-hungry Sectors . . . . . . . . . . . 6.2.2 Effective Tool to Get High Return of Investment for Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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6.3 Dense Network as a Possible Facilitator of the Growth of Chinese Trust Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Evidences for the Dense Network Representing China’s Trust Industry. . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Mutual Trust and Network Effects of Dense Network . 6.4 Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The Chinese Trust Industry in the Near Future Towards a Sparse Network: From Guanxi to Institutionalized Trust? . . . 7.1 Potential Problems of Chinese Trusts: From the Perspective of Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 Unsustainability of Chinese Trust Business Model . . . 7.1.2 Lack the Capability of Property Management in Chinese Trust Companies . . . . . . . . . . . . . . . . . . . . 7.2 Potential Problems of Chinese Trusts: From the Perspective of Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.1 Demand for Property Management Services in China . 7.2.2 Family Trusts Emerging . . . . . . . . . . . . . . . . . . . . . . . 7.3 Nascent Transformation of the Chinese Trust Network: Towards a Sparse Network . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Chinese Trust Business Dilemma . . . . . . . . . . . . . . . . . . . . . . 7.5 The Way Forward: What Is Next? . . . . . . . . . . . . . . . . . . . . . 7.5.1 Possible Justification of Article 2 in Chinese Trust Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.2 Clarification of the Location of Ownership of Trust Property? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.3 Facilitating Social Capital: Building Institutionalized Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 Interim Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Appendix A: List of Sample Interview Questions . . . . . . . . . . . . . . . . . . . 165 Appendix B: List of Interviewees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Appendix C: Selected Inquiries and Answers in the Interviews . . . . . . . 169

About the Author

Zhen Meng is a lecturer at the Department of Law, School of Intellectual Property, Nanjing University of Science and Technology, China, and a researcher at the Intellectual Property Development and Research Center of Jiangsu, China. She holds an LLD from the Graduate School of Law in Kyushu University, Japan, and an LLM and LLB from China University of Political Science and Law. Her research has focused on civil law, commercial law, and intellectual property law, particularly trust law. Her current publications include Should China clarify the ownership of trust assets? A social network perspective. Trusts & Trustees 21(5) 2015, pp. 492– 500; Legal certainty and trusts in China (in Fenwick and Wrbka eds. Legal certainty in a contemporary context, 2016).

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List of Figures

Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

2.1 2.2 2.3 2.4 2.5 3.1 3.2 3.3 3.4 3.5 4.1 4.2

Fig. 4.3 Fig. 5.1 Fig. 6.1 Fig. Fig. Fig. Fig. Fig. Fig.

6.2 6.3 6.4 6.5 7.1 7.2

Fig. 7.3 Fig. 7.4 Fig. 7.5

External property management system provided by trust . . . . . . Devices of use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Devices of trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Illustration of Shandong Food v. Jinan Yingda . . . . . . . . . . . . . Illustration of Beijing Haidian v. Shenzhen Xinhua . . . . . . . . . . Illustration of the case above . . . . . . . . . . . . . . . . . . . . . . . . . . . Illustration of the case of equipment leasing trust above . . . . . . Transaction structure of asset backed securitization . . . . . . . . . . Transaction Structure of REITs . . . . . . . . . . . . . . . . . . . . . . . . . Illustrations of Patrimony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interlocking guanxi network . . . . . . . . . . . . . . . . . . . . . . . . . . . Three categories of Chinese guanxi and trust in each category . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Triad types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Location of the interviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Assets under Management (AuM) of Financial Sectors in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chinese trust assets outstanding and rate of growth . . . . . . . . . Conceptual transaction structure of single trusts . . . . . . . . . . . . Conceptual transaction structure of collective trusts in China . . Conceptual network of trust business in China . . . . . . . . . . . . . Impact of rapidly changing environment on trust loan volume . Number and composition of Chinese HNWIs from 2008 to 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total wealth and distribution of Chinese HNWIs’ investable assets from 2008 to 2013 . . . . . . . . . . . . . . . . . . . . . Asset allocation of Chinese HNWIs from 2009 to 2013 . . . . . . Conceptual stages of the world’s wealth markets development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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List of Figures

Fig. 7.6 The changing trend for investment channels among Chinese HNWIs from 2009 to 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Fig. 7.7 Chinese HNWIs’ wealth preservation arrangement . . . . . . . . . . . . 145 Fig. 7.8 Three business models that Chinese trust companies will focus on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

List of Tables

Table 2.1 Legislative history of Chinese trust law . . . . . . . . . . . . . . . . . Table 4.1 Similarities and differences between various approaches to social capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table 4.2 Chinese-western networking differences . . . . . . . . . . . . . . . . . Table 6.1 Trust assets managed by Chinese trust companies in the fourth quarter of 2014 . . . . . . . . . . . . . . . . . . . . . . . . . Table 6.2 Pecuniary trust assets managed by Chinese trust companies in the fourth quarter of 2014 . . . . . . . . . . . . . . . . . . . . . . . . . Table 7.1 Trust assets managed by Chinese trust companies in the fourth quarter of 2014 . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 1

Introduction

Abstract The location of ownership of trust property has been an issue of debate among Chinese scholars since Chinese Trust Law was enacted in 2001. Almost every possible interpretation as to this issue has been presented by Chinese lawyers. Under the frustrating circumstances regarding this issue in China, this book describes various conventional interpretations of Chinese Trust Law submitted by legal scholars, and compares diverse approaches regarding the location of ownership of trust property provided by jurisdictions globally. In order to resolve this question, instead of directly answering the question “who is the owner of trust property in China?”, this book develops a new but more practical way to explain what has been facilitating the thriving Chinese trust industry in spite of the ambiguity of the Trust Law, using a social capital perspective. This book also further tries to predicts under what conditions is the time ripe to clarify the location of the ownership of trust property in China.

1.1

Background and Research Problem

Trust is a legal device for wealth management, which is considered to have originated in common law societies, particularly in England. For centuries, the trust in England had been employed as the vehicle for estate planning by farmers, and then by urban middle class citizens. Before the mid-twentieth century, for common law lawyers, trust had been related to testamentary and inter vivos personal or family trusts.1 However, today, trust is used not only for family settlements during life and for the flexible disposition of decedents’ estates, but it also is used in many kinds of commercial transactions and business relationships, such as trust of receivables, business trust etc., and collective fund trust.2 In a modern economy, the trust, among banking, security, and insurance, is considered as one of the four mainstays

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Waters (2007), p. 1. Restatement of the Law Third, Trusts (US, 2003), Part 1 Chap. 1 IN NT. See also McKinsey (2014) and D’Angelo (2014).

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© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2_1

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1

Introduction

of financial system. Commercial trusts are now widely utilized in many jurisdictions in the world that have a developed financial infrastructure. This development of the trust leads to a recent trend in the reception of the trust in civil law jurisdictions. In a global context, by 2000, up to 53 jurisdictions worldwide possess statute or a code expressly or impliedly providing for “trust”, excluding the world’s main common law jurisdictions (i.e., England, US, Canada, Australia, Hong Kong, Singapore, India etc.).3 European civil law countries made great efforts in embracing the trust, partially due to the demand for trust as a legal vehicle for professional financial management, and partially because of the pressure within the European Community to reduce the barriers among the private law systems of the member states, particularly between the common law and civil law systems.4 As a result, the Hague Convention on the Law Applicable to Trusts and on their Recognition (hereinafter, the “Hague Trusts Convention”) was concluded in 1985.5 The Hague Trusts Convention helps those countries solve the problems of conflict of laws between common law and civil law jurisdictions by means of harmonizing different understandings in the concept of trust. Among the so-called “mixed jurisdictions,”6 Scotland, Quebec, Louisiana, and South Africa are the four typical jurisdictions that conceptualized trust in order to integrate it into their mixed legal system. The Scots courts made some significant interpretation of the concept of trust in the cases, which constitute the basic rules for the later cases. Quebec includes the regulation on the trust in the fiducie7 of its Civil Code. Both Louisiana and South Africa have their respective statutes on trust, namely Louisiana Trust Code, and Trust Property Control Act of South Africa (Article 57).

3 The text for each of these 53 “trusts” is supplied in Lupoi (2000). As of the present date the number is in excess of 53. See also Waters (2006), p. 180. 4 Hansmann and Mattei (1998), p. 436. See also von Bar and Clive (2010), Banakas (2006), Watanabe (2010), Waters (2006) and Koessler (2012). 5 The Hague Trusts Convention was concluded on 1 July 1985, entered into force 1 January 1992, and is as of by 2015 ratified by 15 states. For the members of this convention, see http://www. hcch.net/index_en.php?act=conventions.status&cid=59. Accessed 12 May 2015. 6 The classic definition of a mixed jurisdiction of nearly one hundred years ago was that of Walton, stating that “Mixed jurisdictions are legal systems in which the Romano-Germanic tradition has become suffused to some degree by Anglo-American law.” See Walton (1980). This is not too different from the modern definition of a mixed legal system given by Robin Evans-Jones: “What I describe by the use of this term in relation to modern Scotland is a legal system which, to an extensive degree, exhibits characteristics of both the civilian and the English common law traditions.” See Evans-Jones (1998). For the list of mixed jurisdictions, see Tetley (1999). 7 Article 2011 of Civil Code of Quebec (1991) defines fiducie as the arrangement by which one or more settlors transfer property, rights or guarantees for the performance of an obligation, or an assemblage of property, rights or guarantees, present or future, to one or more trustees who, holding them separate from their own patrimony, act for a determinate purpose in favor of one or more beneficiaries.

1.1 Background and Research Problem

3

In Asia, Japan pioneered the legislation of the trust. Japan enacted the Trust law and Trust Business Act in 1922, and the Act on Engagement in Trust Business Activities by Commercial Banks8 in 1943. These three statutes were amended in 2006, 2004 and 2009 respectively to adapt them to the flourishing use of trust for various purposes including, without limiting to off-balance financing.9 Similar statutes were adopted by Korea (the Korean Trust law in 1961, revised in 2011). Taiwan and Mainland China enacted trust laws in 1996 and 2001 respectively, influenced by the Japanese Trust law, as well.10 However, from a global perspective, legislators in civilian jurisdictions have often endeavored to find solutions for theoretical and technical problems when implementing trust in their legal system. These problems include the absolute nature of ownership; the doctrine of numerus classus; the necessity of formality and public notice for a right to be enforceable against third parties; and the existence of rules in civil law jurisdictions that are applicable to the trust scenario but yield different results; the absence of some key trust incidents in indigenous civil law (such as the duty of loyalty).11 As some scholars pointed out, “perhaps the greatest difficulty the civilians have in accepting the trust is caused by the distinction between the legal and the equitable ownership.”12 It is widely considered that the “dual ownership” concept is a key feature of common law trusts. The central element of common law trust is that legal ownership/title of trust property is transferred to the trustee by the establishment of trust, while the beneficiary obtains the beneficial ownership/title of trust property. A trust permits a division in the ownership of the trust property between a trustee and a beneficiary so that the trustee is compelled to act entirely in the best interests of the beneficiary regarding the management of the trust property. That is to say, the trustee obtains appropriate control over the trust property in order to manage them effectively, while the beneficiary obtains the beneficial enjoyment of the property so as to check on the trustee’s powers to avoid abuses. However, this mechanism runs counter of generally accepted civil law principles, particularly, the theory of “absolute ownership” and numerus clausus principle.13

8

After amendment in 2009, the Act on Engagement in Trust Business Activities by Commercial Banks (普通銀行の信託業務の兼営等に関する法律) is referred as Act on Engagement in Trust Business Activities by Financial Institutions (金融機関の信託業務の兼営等に関する法律). Its translation into English is available at http://www.japaneselawtranslation.go.jp/law/detail/?id= 2342&vm=04&re=01. Accessed 13 June 2015. 9 See Teramoto (2007a, b). 10 See Wang et al. (2013) and He (2005). 11 See Ho and Lee (2013). 12 See e.g. Gretton (2000), p. 599. 13 See Bolgár (1953), p. 212.

4

1

Introduction

The Chinese Trust Law uses vague terminologies in defining a trust,14 such vagueness is causing confusion not only theoretically but also practically. An example being that in a case in 2001,15 trust property was held by the court as owned by the trustee. In the decision, the court commented that the transfer of the ownership of trust property from the settlor to the trustee is essential to create a trust. However, in a later case in 2007,16 another court commented that even if the trust property has been transferred from the settlor to the trustee, either the settlor or the beneficiary is the owner of the trust property, in order to make clear the location of ownership of trust property to a third party. Nevertheless, over the past decade, Chinese trust industry has been growing dramatically, becoming the second largest financial sector in China. It seems that the Chinese trust business grows dramatically in spite of the legal certainty regarding the location of the ownership of trust property. Under the frustrating circumstances outlined above, observing the social and economic facts in the reality of the trust business will help to develop more practical understanding of this issue, and this in turn will help to facilitate the growth of the trust business.

1.2

The Academic Debate on the Location of Ownership of Trust Property in China

The difficulties in solving the problem of the location of the ownership on trust property have been explored by legal scholars in civil law jurisdictions.17 Particularly, in the existing studies on this topic in China, almost every possible

14 Article 2 of Chinese Trust Law in its original language: “本法所称信托,是指委托人基于对受 托人的信任,将其财产权委托给受托人,由受托人按委托人的意愿以自己的名义,为受益人的 利益或者特定目的,进行管理或者处分的行为.” (Emphasis added). Its English translation in the Database of Laws and Regulations by the National People’s Congress of China: “[T]rust refers to that the settler, based on his faith in trustee, entrusts his property rights to the trustee and allows the trustee to, according to the will of the settler and in the name of the trustee, administer or dispose of such property in the interest of a beneficiary or for any intended purposes.” (Emphasis added.) http://www.npc.gov.cn/englishnpc/Law/Frameset-page2.html. Accessed 13 June 2015. The ambiguous wording of “entrust” and other relevant provisions in this Law leave open the question as to the location of trust property ownership. See Chap. 2. 15 Shandong Shipin Youxian Gongsi v. Jinan Yingda Guoji Xintuo Touzi Gongsi (Shandong Food Co. Ltd. v. Jinan Yingda International Trust and Investment Co, Ltd.), the Court of Shizhong District, Jinan, Shangdong, First Instance Civil Case No. 1707 (2001). 16 Beijing Haidian Keji Fazhan Youxian Gongsi v. Shenzhen Xinhua Jinyuan Touzi Fazhan Youxian Gongsi (Beijing Haidian Science and Technology Development Co., Ltd. v. Shenzhen Xinhua Jinyuan Investment and Development Co., Ltd.) Chongqing High People’s Court, First Instance Civil Case No. 14 (2006). 17 See Bolgár (1953). See also Honoré (1997, 2008) and Koessler (2012).

1.2 The Academic Debate on the Location of Ownership of Trust Property in China

5

interpretation as to this issue has been presented. Generally, the following are prevalent among them18: 1. By transferring ownership of trust assets from the settlor to the trustee, a trust is established19; 2. The ownership of trust assets remains with the settlor even after the establishment of a trust. It is noted that the settlor’s retention of trust property ownership is quite different from the approaches adopted by other civil law jurisdictions such as Japan, Korea etc.20; 3. The ownership of trust assets is transferred to the beneficiaries from the settlor upon the establishment of a trust21; 4. The titular ownership22 of trust property is with the trustee, while substantive ownership thereof is jointly with the settlor and beneficiaries upon the establishment of a trust23; 5. The ownership of trust assets is with either the settlor or the trustee depending on whether the settlor had transferred ownership of trust property to the trustee.24 Civil law scholars have debated for a long time on the issue regarding the location of trust property ownership. However, one important point that is rarely taken into consideration by trust law scholars in civil law jurisdictions is the practice of the trust business itself and the ever-changing social and economic context surrounding it. Studying the attitudes and behavior of the stakeholders in the trust business might be one way to understand the issue regarding the location of trust property ownership beyond the ambits of abstract principles.

1.3

Aim, Outline, and Methodology

This book does not intend to define appropriate fixed interpretation for the Chinese Trust Law, which accords to the conventional understanding under civil law principles. Instead of seeking to directly answer the question “who is the owner of trust property in China?” the research questions of this book are:

18

Ho (2012). See e.g. Wang (2008), Yu (2010) and Qu (2003). 20 See e.g. Zhang (2007a, b) and Graham and Steeny (2012). 21 See e.g. Wen and Feng (2005). 22 In the point of view of this interpretation, the trustee has the ownership rights of trust property in name only, but does not have the power, responsibilities, or duties related to the trust property. 23 See e.g. Hu and Chen (2006). 24 See e.g. Lou (2012). 19

6

1

Introduction

• Is the uncertainty of Chinese Trust Law regarding the location of the ownership of trust property a problem in practice? • What has been facilitating the thriving Chinese trust industry in spite of the ambiguity of the Trust Law? • How does social capital matter in understanding the Chinese Trust Law as to the ownership of trust property? • Under what conditions is the time ripe for China to clarify the location of the ownership of trust property? This book proceeds firstly from the comparative perspective. By comparative analysis, approaches to solve the same or similar problem in other civil law and mixed jurisdictions are summarized. An additional approach used to develop the arguments in this book is provided by a social capital perspective. In light of the above-mentioned context and considerations, this book proceeds through six chapters besides the Introduction (Chap. 1) and the Conclusion (Chap. 8). Chapter 2 starts with an observation and description of the historical background of Chinese trusts, which is essential to understand why it was necessary for China to enact the trust law in 2001. In the first section, it firstly describes the development and problems of trust and investment companies in modern China; and then examines the reasons for the need of trust industry in China before the enactment of the trust law; it also explains why the Chinese legislature considered the trust law as a necessary solution to the further development of trust industry; and finally it describes the legislative procedure of the trust law in China, showing the disputes among legislators during the legislative procedure. In the second section, it moves on to outline the origin of trust law in common law system, and the recent trend in the reception of trust in a global context, and then discusses the conflicts between the concept of “trust” and the civil law principles. The last section of this chapter focuses on Article 2 of Chinese trust law, explaining the practical problems accompanied with it. Chapter 3 provides a comparative analysis on the diverse approaches in which the civil law countries deal with the issue regarding the ownership of trust property. The basic concepts of the “dual ownership” and “absolute ownership”, and the conflict between these two concepts are elaborated in the first section of this Chapter. Then, this Chapter outlines the different scenarios regarding the ownership of trust property in China. Specifically, it examines various conventional interpretations of Article 2 of the Chinese Trust Law suggested by Chinese legal scholars. Further, this Chapter moves on to explain the approaches adopted by the so-called “mixed jurisdictions” such as Scotland, Quebec, Louisiana, and South Africa; also, the trust laws in East Asian jurisdictions such as Japan, Korea, and Taiwan are overviewed. This Chapter ends with a critical summary of the existing debates. In Chap. 4, several basic concepts—namely, social capital, social trust, social network, and Guanxi (关系)—which account for the substantial analyses in this book are outlined. This Chapter begins with a brief introduction of the social capital theory. The explanations of social capital by three seminal figures—Pierre

1.3 Aim, Outline, and Methodology

7

Bourdieu,25 James Coleman26 and Robert Putnam,27 who are considered to have contributed much to the conceptualization of social capital—are reviewed in the first section of this Chapter. At the same time, since Nan Lin28 has contributed to the theoretical development, devised measurements and conducted empirical research in the areas of social networks and social capital, this section also reviews his point of view on the concept of social capital. Then, this Chapter moves on to another conceptual tool: social trust. It discusses the role of social trust in various terms, especially in economic growth. A pair of relevant concepts, namely “personal trust” and “institutionalized trust”, is explained in the second section. Further, this Chapter elaborates a distinctive notion of Guanxi in China, followed by the explanation on the impacts of Guanxi on the Chinese Business Culture. In light of these concepts, this Chapter proposes a hypothesis which can explain at least a part of the issue on ownership of trust property in China. In addition, a short section in this chapter explains the Social Network theory and the Social Network Analysis. Although this book does not conduct a social network analysis which requires quantitative researches, these theories are also relevant because they are helpful to conceptualize the qualitative research which will be discussed in Chap. 5. The hypotheses proposed in Chap. 4 need to be tested or refined with empirical evidences. To this aim, an empirical study on China’s trust industry is conducted, focusing on the development of trust business and the changing relationship between the financial service providers and the investors including ordinary consumers. Chapter 5 describes and explains the methods how the empirical study is conducted. The analysis presented in this book draws on empirical material from two main sources: (a) statistical data from industrial reports, and (b) targeted in-depth interviews. In this research, data about the development of trust business is collected from written documents, while the data showing or suggesting the relationship between financial institutions and ordinary consumers is gathered from face-to-face interviews and supplemented by follow-up communications through e-mails. The industrial reports include a wide range of materials from government or “official” documents (such as China Trust Association29) to working papers 25

Pierre Bourdieu (1930–2002) was an influential French sociologist, who is generally considered to start the research of social capital from the perspective of social network. 26 James Coleman (1926–1995) was an eminent American sociologist. In his well-known book, Coleman (1994), he made a tremendous contribution to the definition of social capital. 27 Robert Putnam (1941–) is a political scientist and Professor of Public Policy at the Harvard University. He broadens the concept of social capital to include a variety of types of social interactions such as the writing of greeting cards, families eating together, or entertaining friends at home. 28 Nan Lin (1938–) is a professor of sociology of the Trinity College, Duke University. He is most notable for his research and writing on social networks and social capital. 29 China Trustee Association is a non-profit social organization approved by China Banking Regulatory Commission. It is committed to fulfilling the functions of self-discipline, rights protection, coordination and provision of services, serving as a bridge and bond between regulatory authorities and trust companies. China Trustee Association releases data about Chinese trust industry at the end of every quarter of the year since 2010.

8

1

Introduction

(such as annual report of trust industry30) and journal papers. The quantitative data associated with the development of China’s trust industry can be found specifically in these documents. The author conducted face-to-face interviews in the first place, and also contacted with interviewees through telephone and/or emails for the follow-up questions. The interviewees are from the Chinese middle-class in two Chinese major cities (Beijing and Zhengzhou). Following a brief introduction of research questions and research methods, this Chapter spends one section to explain the ways in which the statistical data of trust industry in China is collected, and spends another section to explain the method to collect data via targeted in-depth interviews. This Chapter ends with several important selected results of this empirical research, and an explanation on the limitations of this empirical research. It is hypothesized in Chap. 4 that the actors in the network of China’s current trust business, including its customers, are closely connected with one another directly or indirectly. And the empirical research in Chap. 5 provides evidences supporting this hypothesis. Subsequently, Chap. 6 analyzes the relevant empirical evidences, and justified the said hypothesis. The first section of this chapter provides statistical evidences for the growth of Chinese trust industry, and also analyzes the business models that are currently taken by Chinese trust companies. Then, the functions of trusts in modern China, which also serve as the engine for the rapid growth of China’s trusts, are explained. Moreover, a social network perspective allows us to identify some other crucial factors for the development of China’s trust business. The current trust industry in China is deemed to be based on a dense network, and the evidences are illustrated in this Chapter. Further, this Chapter employs the concepts of mutual trust and network effects to analyze the characteristic of this dense network. This Chapter suggests that these factors together contribute to the explanation of the booming of China’s trust business in spite of ambiguity of Chinese Trust Law on the location of ownership of trust property. However, through the statistical data collected from the industry reports, Chap. 7 predicts a nascent decrease in the size of Chinese trust business, and that there emerges an ongoing transformation of trust business model in China. First of all, this Chapter explains the potential problems of Chinese trust industry from the perspective of both the service providers and the consumers. In this respect, it analyzes the possible unsustainability of the current trust business model, and also illustrates the demand of asset management services, especially family trusts, for Chinese High Net Worth Individuals (HNWIs). Then this Chapter proposes that the Chinese trust network is transforming towards a sparse network. Actors within a sparse network are less likely to have thick social capital that they can easily rely on to achieve cooperation with other actors within the same network. In a sparse network, lack or low degree of mutual trust between actors within the network is 30

For example, Trust and Fund Research Institution affiliated to Renmin University of China, publishes a report on the development of China’s trust industry every year since 2004. There are also reports and surveys on China’s trust industry conducted by trust companies, law firms, or accounting companies.

1.3 Aim, Outline, and Methodology

9

more likely to happen. Consequently, the trust business in China is facing a dilemma, which is also analyzed in this Chapter. On one hand, there is an increasing demand of trust products for HNWIs; on the other hand, Chinese trust industry is stepping into the decline stage of the business life cycle. In view of this, the final section of this Chapter first provides a possible justification of Article 2 of Chinese Trust Law; then it explains the reasons why the ambiguity of trust law regarding the ownership of trust property might matter in the near future. Following this is a suggestion on possible solutions that could be provided by the trust law for the potential trust business dilemma.

1.4

Originality

Though this book develops on the basis of the existing legal researches and debates, the author would like to address three points of originality of this book. Firstly, as mentioned earlier, instead of trying to directly answer the conventional legal question “who is the owner of trust property in China?” this book focuses on some more practical issues: Is the uncertainty of Chinese Trust Law as to the ownership of trust property a problem in practice? What have been facilitating the thriving Chinese trust industry in spite of the ambiguity of the Trust Law? Under what conditions might clarification of the ownership of trust property in China be desirable or even necessary? These questions have more value to the practice, and are more urgent to be answered. This book focuses on developing an explanation of the fact that Chinese trust business has expanded in spite of this uncertainty. Moreover, this explanation will help to facilitate the growth of the Chinese trust business. Under certain circumstances, the uncertainty of the Law regarding the ownership of trust property might have positive effects on the development of Chinese trust business. The Law leaves the issue open to the practice to find solutions, which might be more effective than the legislation. With the development of Chinese trust business in recent decades, it is fair to address the issue that whether the time is ripe to clarify the ownership of trust property by legislation. For another, this book proposes a new perspective to study the issue of the ownership of trust property, namely, a social capital perspective. This book utilizes conceptual tools provided by social capital theory. By observing and expecting the existing and potential social actions surrounding the Chinese trust business, we are allowed to explain or design the legal norms that best fits with social reality. Moreover, this research utilizes empirical data to support the arguments of this book. It collects the latest statistical data from the official or professional reports on the development of Chinese trust industry, which contributes a lot to the analysis of Chinese trust business life cycle. This quantitative data also helps to develop the argument on the transformation of Chinese trust industry in the near future. More importantly, the targeted in-depth interviews provide first-hand information about the attitude of potential consumers towards financial service providers in China, which serves as evidence to test the hypotheses in this book.

10

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Introduction

References Banakas S (2006) Understanding trusts: a comparative view of property rights in Europe. InDret 323(1):1–9 Bolgár V (1953) Why no trusts in the civil law? Am J Comp Law 2(2):204–219 D’Angelo N (2014) Commercial trusts. LexisNexis, New York Evans-Jones R (1998) Receptions of law, mixed legal systems and the myth of the genius of scots private law. LQR 114:228 Graham T, Steeny P (2012) The Chinese trust. Trusts Trustees 18(1):36–42 Gretton GL (2000) Trusts without equity. Int Comp Law Q 49:599–620 Hansmann H, Mattei U (1998) The functions of trust law: a comparative legal and economic analysis. N Y Univ Law Rev 73(2):434–479 He B (2005) Xintuofa yuanli yanjiu (Research on the principles of the trust law). China Legal Publishing House, Beijing Ho L (2012) Trust laws in China. In: Smith Lionel (ed) Re-imaging the trust: trusts in civil law. CUP, New York, pp 183–221 Ho L, Lee R (2013) Reception of the trust in Asia: a historical perspective. In: Ho L, Lee R (eds) Trust law in Asian civil law jurisdictions: a comparative analysis. CUP, New York, pp 10–26 Honoré T (1997) Obstacles to the deception of trust law? The examples of South Africa and Scotland. In: Rabello AM (ed) Aequitas and equity: equity in civil law and mixed jurisdictions. Hebrew University of Jerusalem, Jerusalem Honoré T (2008) On fitting trusts into civil law jurisdictions. http://ssrn.com/abstract=1270179. Accessed 17 June 2015 Hu G, Chen Q (2006) Quanneng fenge: lun woguo xintuofa zhi xintuo caichan suoyouquan (Separating the right and the power: trust property proprietary rights in Chinese trust law). J Zhengzhou Univ 39(6):84–88 Koessler J (2012) Is there room for the trust in a civil law system? the French and Italian perspective. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2132074. Accessed 25 June 2015 Lou J (2012) Xintuo caichan de dulixing yu xintuocaichan guishu de guanxi (Relationship between the trust property segregation and the ownership of trust property). J Guangdong Soc Sci 2:242–250 Lupoi M (ed) (2000) Trust laws of the world: a collection of original texts, 2 vols. ETI, Rome McKinsey (2014) Global Wealth Management Survey 2014: an attractive sector in transition. http://www.mckinsey.com/*/media/mckinsey%20offices/france/pdfs/global_wealth_ management_survey_2014.ashx. Accessed 29 Aug 2015 Qu C (2003) The doctrinal basis of the trust principles in China’s trust law. Real Prop Probate Trust J 38(2):345–376 Teramoto M (2007a) Chikujou kaisetsu shin shintakuhou (Commentaries on the new trust law article by article). Shojihomu, Tokyo Teramoto S (2007b) Kaisetsu shin shintakuhou (Commentaries on the new trust law). Koubundou Publishers, Tokyo Tetley W (1999) Mixed jurisdictions: common law vs. civil law (codified and uncodified) (Part I). Unif Law Rev 3:591–618 von Bar C, Clive E (eds) (2010) Principles, definitions and model rules of European private law: draft common frame of reference. OUP, Oxford Walton FP (1980) The scope and interpretation of the civil code. Butterworths, Toronto Wang Y (2008) Lun xintuofa yu wuquanfa de guanxi: xintuofa zai minfa faxi zhong de wenti (Relationship between trust law and property law: toward the questions of trust law in civil law system). J Peking Univ (Philos Soc Sci) 6:93–101

References

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Wang W-Y, Wang C-C, Shieh J-S (2013) Trust law in Taiwan: history, current features and future prospects. In: Ho L, Lee R (eds) Trust law in Asian civil law jurisdictions: a comparative analysis. CUP, New York, pp 63–79 Watanabe H (2010) ‘Trusts without equity’ and prospects for the introduction of trusts into European civil law systems. Q Rev Corp Law Soc 7:187–200 Waters D (2006) The future of the trust (Part I). J Int Trust Corp Plan 13(4):179–223 Waters D (2007) The future of the trust (Part II). J Int Trust Corp Plan 14(1):1–22 Wen S, Feng X (2005) Lun xintuo caichan suoyouquan (Ownership of trust property). Wuhan Univ J (Philos Soc Sci) 58(2):203–209 Yu H (2010) Lun yingmei xintuo caichan shuangchong suoyouquan zai zhongguo de bentuhua (Localization of dual ownership of trust property in China). Mod Law Sci 32(3):159–168 Zhang C (2007a) Woguo xintuo caichan suoyouquan guishu de taidu jiqi fali shenshi (An examination of the Chinese attitude towards the ownership of trust property). J Gansu Inst Polit Sci Law 91:7–14 Zhang C (2007b) Lun you shoutuoren xiangyou de xintuo caichan suoyouquan (Trust properties owned by trustee). J Jianghai Acad 5:124–130

Chapter 2

Trust Law of China and Its Uncertainty Regarding the Location of Ownership of Trust Property

Abstract This chapter starts with an observation and description of the historical background of Chinese trusts, which is essential to understand why it was necessary for China to enact the trust law in 2001. In Sect. 2.1, it firstly describes the development and problems of trust and investment companies in modern China; and then examines the reasons for the need of trust industry in China before the enactment of the trust law; it also explains why the Chinese legislature considered the trust law as a necessary solution to the further development of trust industry; and finally it describes the legislative procedure of the trust law in China, showing the disputes among legislators during the legislative procedure. In Sect. 2.2, it moves on to outline the origin of trust law in common law system, and the recent trend in the reception of trust in a global context, and then discusses the conflicts between the concept of “trust” and conventional way of thinking by lawyers of civil law jurisdictions. Section 3 of this chapter focuses on Article 2 of Chinese trust law, explaining the practical problems accompanied with it.

As is well known, trust law has long been considered by scholars as one of the major features distinguishing the common law systems from the civil law systems.1 The law of trusts originated in the England. This mechanism has greatly facilitated the economic growth in the modern world, especially commercial trusts (such as securities trusts, fund trusts, and real estate trusts) contributes a lot to the development of financial markets in developed counties.2 In civilian jurisdictions, there have emerged trends in the reception of trusts. By the year 2000, except for the main common law jurisdictions (such as England, US, Canada, Australia, Hong Kong, Singapore, India), up to 53 jurisdictions in the world have laws expressly or impliedly providing for the trust, and the number is going up.3 1 Hansmann and Mattei (1998), p. 436. See also Fisher (1911), pp. 271–272. The renowned English historian Maitland said of trust: “If we were asked what was the greatest and most distinctive achievement performed by Englishmen is the field of Jurisprudence, I cannot think that we could have any better answer to give than this, namely, the development from century to century of the trust idea”. 2 See Graziadei et al. (2005), D’Angelo (2014), Schwarcz (2003). 3 Waters (2006), p. 180.

© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2_2

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14

2 Trust Law of China and Its Uncertainty Regarding the Location …

China introduced the concept of “trust” around a century ago,4 though this concept was not generally implemented in Chinese trust practice.5 Trust institutions faced problems in doing business during the development of Chinese trust industry. For example, among the problems are: the disorder of management of trust institutions, the shortcomings of company internal control, the common practice of unlawful management of property, the insufficient quality of the capital and the huge potential risks, etc.6 It is considered by Chinese scholars that such problems were partially caused by the fact that the concept of trust was not generally implemented in the practice, because the trust institutions were simply utilized as a tool for financing for the local governments,7 without developing corporate governance.8 China enacted the Trust Law in 2001 (No. 50 of 2001), the year when China entered into the WTO, with the expectation to regulate the trust industry and to facilitate economy growth of China.9 The Trust Law was expected to provide new ways of business transactions which cannot be achieved through other transaction structures, and create increased business opportunities for both domestic and foreign investors. However, because of the possible or actual tension between the concept of the common law “trust” and the indigenous civil law regimes (such as the possible conflict between the concept of “dual ownership” and “absolute ownership”),10 scholars in civilian jurisdiction have often endeavored to find solutions for theoretical and technical problems when introducing trust law. These problems in the understanding of lawyers of civil law jurisdictions include the absolute nature of ownership; the doctrine of numerus classus; the necessity of formality and public notice for a right to be enforceable against third parties; and the existence of rules in civil law jurisdictions that are applicable to the trust scenario but yield different results; the absence of some key trust incidents in indigenous civil law (such as the duty of loyalty).11 Chinese Trust Law also faces difficulties in integrating trust principles into its own legal regimes based on conventional civil law framework. Among others, Article 2 of Chinese Trust Law has given rise to hotly debate regarding “the location of ownership to trust property.” Chinese law practitioners are not much concerned with such theoretical conflict, because currently trust properties in China are almost money.12 In few cases, the settlor sets a trust on properties (such as real

There are scholars arguing that China has its own origin of the “trust” in ancient times, but the trust industry in China is basically based on the concept of “trust” originated in the UK. 5 Wang (2002), p. 285. 6 Wang (2002), p. 286. 7 In this context, local governments usually refer to the governments of Chinese prefectures. 8 Wang (2002), p. 285. 9 Wang (2002), p. 285. 10 The concept of “dual ownership” and “absolute ownership will be explained in Sect. 3.1. 11 Specific explanation on each issue will be illustrated in this chapter. 12 According to Chinese law, the ownership of money is held by the person or legal entity that possesses money. 4

2 Trust Law of China and Its Uncertainty Regarding the Location …

15

estates) that need registration, however, according to Chinese practitioners, trusts on such properties that need registration are emerging and will develop fast in the near future in China.13 Since China has not enacted registration rules for trust property, law practitioners in China might face difficult to deal with the issue on the location of the ownership of trust property.

2.1 2.1.1

Background of Chinese Trust Law The Development and Problems of Chinese Trust Business Before the Enactment of Trust Law

Trust business in China started with the emerging trust and investment companies, which mainly did commercial trust business. Trust and investment companies were introduced to China more than a century ago, but they were abolished for nearly 30 years after the foundation of the People’s Republic of China in 1949.14 It was only since 1979 when the Reform and Open Door Policy was adopted that trust and investment companies were re-established in the wake of China’s financial reform.15 At the early stage of the Reform and Open Door Policy, the Chinese financial system was reformed by the government, with the attempt to cast off the limitations stemming from the Chinese traditional financial system16 and the “planned economy”, and to facilitate the development of market economy.17 In a planned economy, a central authority, usually a government agency, formulates a plan in which decisions regarding production and investment are embodied. Since 1979, the planned economy system was collapsed by actions of the government, and developed towards the market economy. In a market economy, it is generally 13

Reference to the interviews the author conducted with Chinese citizens, as explained in Chap. 5. There were political reasons for this phenomenon, after the foundation of People’s Republic of China in 1949, the Chinese government launched anti-capitalism campaigns. For example, the Cultural Revolution (文化大革命) in China has had immense negative influence on the development of trust and investment companies. 15 Gebhardt and Hanisch (2002), p. 1. 16 See Allen and Qian (2014). “After the founding of the People’s Republic of China in 1949, all of the pre-1949 capitalist companies and institutions were nationalized by 1950. Between 1950 and 1978, China’s financial system consisted of a single bank—the People’s Bank of China (PBOC). This bank was owned and controlled by the central government under the Ministry of Finance. It served as both the central bank and a commercial bank, controlling about 93% of the total financial assets of the country and handling almost all financial transactions.” 17 Regarding the relevant regulations, see e.g. Guowuyuan guanyu zhongguo renmin yinhang zhuanmen xingshi zhongyang yinhang zhineng de jueding (国务院关于中国人民银行专门行使 中央银行职能的决定) (Decision on PBOC exercising the functions of the central bank) (1883); Guowuyuan guanyu jinrong tizhi gaige de jueding (国务院关于金融体制改革的决定) (Decision of the State Council on Reform of the Financial System) (1993). 14

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considered that decisions regarding investment, production, and distribution mainly depend on supply and demand. In modern economy, trust, among banking, security and insurance, is considered as one of the four mainstays of financial system, which was already evidence in developed economies, therefore, the People’s Bank of China18 issued a document of Actively Experimenting with Running Various Kinds of Trust Business in 1980, seeking to make trust play an important role in Chinese financial market. Consequently, local governments, enterprises and other institutions followed the requirements of this document, establishing trust and investment companies of various forms and sizes.19 After 1979 when the first trust and investment company China International Trust & Investment Co.20—was established, trust companies mushroomed throughout China, the number of which reached more than 1000 at its peak in 1998.21 However, trust system tended out to be employed by Chinese local governments to accumulate as much foreign and domestic capital as possible to make these funds available for investment within China.22 These trust companies typically were state-owned companies, whose chief managers are always officials in local governments. The local governments raised funds for construction or infrastructure through their own trust companies, instead of getting loans from banks.23 According to relevant regulations24 in 1980s, trust institutions had similar business scope to commercial banks. To some extent, trust companies played a role of substitution for commercial banks. The trust institutions whose names contain the word “trust”, in fact, rarely did trust business. The “trust” business they operated were “trust deposits”,25 “trust loans”, and “trust investments”,26 which involved the taking of capital from

18

The People’s Bank of China is the central bank of China with the power to control monetary policy and regulate financial institutions in mainland China. 19 Wang (2002), p. 285. 20 Today, China International Trust & Investment Corporation has transformed into a wholly state-owned company through comprehensive restructuring and changed its name to CITIC Group Corporation (中国中信集团有限公司), short for CITIC Group. See its website: http://www. citicgroup.com.cn/wps/portal/!ut/p/b1/04_Sj9CPykssy0xPLMnMz0vMAfGjzOI9w8zcLULdQoM 9XV1MDRxNXL283H09DE3MjPQLsh0VAc0LKs8!/. 21 Gebhardt and Hanisch (2002), p. 1. 22 Wang (2002), p. 285. 23 Gebhardt and Hanisch (2002), p. 1. 24 See e.g. Jinrong Xintuo Jigou Guanli Zanxing Guiding (金融信托机构管理暂行规定) (Provisional Regulations for the Control of Financial Trust and Investment Institutions) (1986, repealed). 25 “Trust deposits”, in its original language “信托存款”, had no significant difference from bank deposits. The trust funds were on the balance sheet of the trust company. 26 “Trust loans” and “trust investments”, in its original language “信托贷款” and “信托投资”, had two different types of businesses. One type was in fact entrustment business rather than trust business, where the principal entrusts funds to trust company and order the trust company to invest into a particular project. The profits (and losses) of the funds went to the customers. The other type of business is similar to bank loans. Trust companies raised fund by bonds, stocks, trust deposits

2.1 Background of Chinese Trust Law

17

customers to be invested (through loans) by the companies for a fixed period of time in return for interest upon maturity. These were essentially deposit-taking activities, especially since there were no requirements for segregation of trust funds from trustee’s own assets, and the profits (and losses) of the trust funds went to the companies rather than to the customers.27 Many trust companies operated in violation of regulations and did not bring into full play the function that the trust should have. During the development of trust and investment companies in China, a variety of problems occurred. Among them are: the excessive number of trust institutions, the disorder of management of trust institutions, the shortcomings of company internal control, the common practice of unlawful management of property, the insufficient quality of the capital and the huge potential risks, etc.28 As a result, the government took five rounds of nationwide clearing and rectification of trust business in 1982, 1985, 1988, 1993 and 1999 respectively. The first round of clearing and rectification in 1982 mainly dealt with rectifying the trust institutions. At that time, many local governments frequently made decisions of transferring “special funds deposits” in banks into “trust deposits” managed by the local governments, which influenced the overall balance of receipts and payments of credit funds.29 In this movement, this kind of activities were stopped by the State Council of China, and only the trust companies that obtained the approval from the State Council of China were allowed to run trust business.30 The second round of clearing and rectification in 1985 focused on the rectification of trust business. The overheating economy in China in 1984 led to an upsurge of Chinese trust industry. The investment hotspot of the trust funds focused on the market of fixed assets. The fixed assets expansion caused the runaway credit and the over-issued currency, therefore, a new regulation31 was promulgated,

(Footnote 26 continued) etc. to be invested. Trust funds were not separate from other assets of the trust company, and not even off balance sheet. The profits (and losses) of the funds went to the trust companies. See Zhongguo Xintuoye Fazhan de Lishi Mailuo (History of Chinese Trust Industry) (Oct. 8, 2014), available at http://www.investide.cn/news/20141008/108540/5.html. Accessed 16 July 2015. 27 See Jiang and Zhou (1994), p. 54. See also Ho (2012), pp. 186–192. 28 Wang (2002), p. 286. 29 Unlike bank deposits which have strict credit requirements, trust deposits in China were less regulated because of the lack of relevant regulations. Therefore, trust scheme were abused by local governments by means of transferring bank deposits into trust deposits, and investing trust funds into overheating markets. See Zhongguo Xintuoye Fazhan de Lishi Mailuo (History of Chinese Trust Industry) (Oct. 8, 2014), available at http://www.investide.cn/news/20141008/108540/5. html. Accessed 16 July 2015. 30 See the regulation Guowuyuan Guanyu Zhengdun Guonei Xintuo Touzi Yewu he Jiaqiang Gengxin Gaizao Zijin Guanli de Tongzhi (国务院发出关于整顿国内信托投资业务和加强更新 改造资金管理的通知) (Notice of the State Council on Rectifying Domestic Trust Investment Business and Strengthening the Update and Transformation of Fund Management) (1982). 31 See the regulation Jinrong Xintuo Touzi Jigou Guanli Zanxing Guiding (金融信托投资机构管 理暂行规定) (Provisional Regulations for the Administration of Financial Trust Institutions) (1986).

18

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aiming to limit the trust business scopes, to regulate the governance structure of trust companies, and to raise the standards regarding the approval procedure of trust institutions. In 1988, the domestic economy in China was overheating, with the constant disorder of economy and high rate of inflation, and the trust business roared to its peak.32 Meanwhile, irregular activities of trust companies (such as unlawfully raising funds, illegally interbank borrowing and lending) occurred, and their internal governance was extremely out of order. For instance, the decision making of trust companies were heavily relied on the local governments rather than the market. All of this resulted in a third round of rectification in trust industry, which emphasized the improvement of corporate internal governance and the construction of Chinese trust system. Large amount of cases in which trust companies did fake trust business had constantly occurred since 1986, and trust institutions began to do business in inter-bank loan market illegally since 1992, which led to the fourth round of rectification. Consequently, the central bank of China reevaluated all the trust institutions and issued business licenses only to those meeting the requirements.33 At the same time, the principle which provides that the banking sector, the trust sector, and the security sector are separate from each other was established by the Commercial Bank Act of China and Chinese Securities Law. The fifth round of clearing and rectification of Chinese trust business was held in 1999 when credit crisis34 threatened trust industry as a whole. At this stage, a large number of trust companies were closed or reorganized by the Central Bank of China in order to drive trust business to play its expected roles. With the deepening of the financial reform in China, trust business gradually shrunk and its operation faced difficulties. In 1998, the bankruptcy of the second largest trust company in China—the Guangdong International Trust and Investment Company—marked a turning point in the development of the trust industry.35 After this, the number of trust companies was reduced to 218 from 1000 of 1988, which were to be further merged into only 60 remaining independent entities.36

32

In this period, the Central Bank of China, various commercial banks, and local governments established trust and investment companies in various forms. The total number of trust investment companies in China reached 1000 at its peak, and the total assets under management of trust companies was more than CNY 600 billion, accounting for 1/10 of the total financial assets in China at that time. 33 See Trust and Fund Research Institution (2012). 34 The credit crisis gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong, Laos, Malaysia and the Philippines were also hurt by the slump. Brunei, China, Singapore, Taiwan and Vietnam were less affected, although all suffered from a loss of demand and confidence throughout the region. 35 See e.g. Farley (1999) Chinese investment firm gitic collapses. http://articles.latimes.com/1999/ jan/12/business/fi-62726. Accessed 16 July 2015. 36 Gebhardt and Hanisch (2002), p. 2.

2.1 Background of Chinese Trust Law

2.1.2

19

The Necessity for Chinese Economy of Further Development of Chinese Trust Industry

Given the frustrating situation of Chinese trust industry outlined above, Chinese authorities were forced to decide whether to continually support the development of trust industry or not. After extensive discussion, a general consensus among the government officials was reached.37 It is widely admitted in China that the emergence of large number of trust activities is the inevitable outcome of the market-oriented reform and open door policy.38 Although for various reasons the trust industry in China operates a mixed range of businesses, the actual trust business39 constituted about 25% of the overall business of the trust industry by the end of twentieth century.40 In addition, trust was demanded in the large scale of the potential wealth management market in China, because there has emerged a comparatively large property market requiring external management. With the Chinese economy developing rapidly, new factors—such as the demand of enterprises for appreciation of their properties, the increase of national wealth, the elaborateness of the division of labor in society—require the assistance of external property management activities. Specifically, for one thing, with the high-speed increase of GDP in China, investment and financial system (especially that of infrastructure programs) demanded effective way to manage its large sum of money. For the other thing, increasingly more private wealth of Chinese people offers a huge market for trusts, however, most of them currently were saved in banks.41 According to statistics, 75% of Chinese residents’ financial assets were deposited in banks by 2005, the savings of residents reached CNY 1490 billion.42 Furthermore, more and more institutional investors such as social security funds, enterprise annuities, housing accumulation funds and various public welfare funds, which reached around CNY 1000 billion by 2005,43 need external capital management. More importantly, there was a demand for trust to improve the structure of Chinese financial market. The majority of Chinese financial business have been dealt with in banks where accumulates a high financial risk. However, a certain number of businesses can gain more effectiveness if the financial scheme

37

Gebhardt and Hanisch (2002), p. 2. Zhou (2002), p. 293. 39 The actual trust business means that the business run by Chinese trust companies that is really utilizing the trust scheme, namely, the trust company manage the trust funds for the benefit of the beneficiary rather than for its own benefits. 40 Zhou (2002), p. 297. 41 See Trust and Fund Research Institution (2012). 42 See China Trustee Association, Trust Industrial Data, http://www.xtxh.net/xtxh/index.jhtml. Accessed 22 June 2015. 43 Trust and Fund Research Institution (2012), p. 28. 38

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Fig. 2.1 External property management system provided by trust

implementing trust is introduced, because trust, as a tool of property management, could contribute to the financial system innovation and financial risk diversification.44 According to the common law concept of “trust”, the most important function of trust is to supply an excellent external property management system for the society (see Fig. 2.1). External management means that the owner of the property does not manage and dispose of his/her property by him/herself, rather, through others. Obviously, the demand for an external property management system will become stronger with the development of the society.45 The trust separates the managerial and beneficial interests of property. The legal title to the trust property belongs to the trustee, based on which the trustee manages, invests and disposes of the trust property, while the beneficiary (sometimes, the beneficiary is the settlor itself) chosen by the settlor or the purpose set forth by the settlor enjoy all the benefits from those actions. The division of the rights and benefits resulting from the trust property, as well as the division of the managerial and beneficial interests of the trust property makes the beneficiary free from the responsibility to manage the property himself, and instead allow him/her merely to enjoy the benefits of the property. Because of the characteristic outlined above of the trust concept, it is generally considered that trust is suitable for people who are not able to manage their own assets or to make arrangements for them, due to lack of time, mental or other capacity, legal constraints etc. Furthermore, it is an efficient way to realize one’s own ideas concerning the disposition of one’s property upon death. Therefore, trust has been playing an important role in many aspect of society in many countries, such as the management of property, inheritance of family property, investment and financing, business activities, public welfare utilities, social security, and even the political life. For all those purposes the scheme of trust can be applied into Chinese society.46 44

Hansmann and Mattei (1998). Zhou (2002), p. 293. 46 Zhou (2002), p. 295. 45

2.1 Background of Chinese Trust Law

2.1.3

21

Trust Law as a Necessary Solution for the Problems of Chinese Trust

After justifying the necessity of the development and reorganization of trust industry in China, the next big step for Chinese government is to enable trust system to play its expected role effectively. Unlike other financial institutions such as banks, security companies and insurance companies having grown based on universal financial schemes, trust companies in China grew in the soil lacking trust tradition and trust concept.47 From the very beginning, the majority of trust companies in China were lack of independent governance policies and clear developmental direction of business,48 therefore, their function was unclear and their scope of business was non-standardized. It has been widely accepted that the most important cause of the problems of trust industry in China was the lagging legislation and the lack of needed legal regimentation and protection for the trust industry. During a period of more than 20 years since 1979, the only regulation particularly applicable to trust companies in China was the “Provisional Regulations for the Control of Financial Trust and Investment Institutions” promulgated by the central bank of China on April 26, 1986. This document provides exclusively the supervision over trust and investment institutions, not including any provisions on the question of what the concept of trust actually is under Chinese law. Furthermore, even the supervisory provisions in this regulation have long been regarded by Chinese scholars and practitioners as insufficient to ensure the orderly operation of the trust industry.49 Thus, after the five rounds of clearing and rectification, the Chinese government started to put forth the idea that it is necessary to regulate Chinese trust by legislation, which aimed to supply an orderly environment for trust activities.

2.1.4

The Legislative History of Chinese Trust Law

Chinese lawmakers had made great effort to the legislation of the Trust Law (see Table 2.1). In August 1993, the Financial and Economic Committee of the National People’s Congress (NPC) organized a draft workshop consist of experts and scholars. It worked out the draft of Trust Law, and in December 1996 the draft was presented to the 23rd session of the NPC Standing Committee for first deliberation. But the public appearance of the trust law was suspended due to great disputes.50

47

Jiang and Zhou (1994), p. 54. Jiang and Zhou (1994), p. 54. 49 Gebhardt and Hanisch (2002), p. 2. 50 Gebhardt and Hanisch (2002), p. 1. 48

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22

Table 2.1 Legislative history of Chinese trust law Year

Procedure

August 1993 December 1996 1998 2001

A draft workshop consisting of experts and scholars was organized The draft of trust law was presented to the 23rd session of the NPC Standing Committee The motion of legislation of trust in China was proposed again The trust law of China was enacted

The motion of legislation of trust in China was proposed again in 1998. The main dispute among lawmakers, experts and scholars was whether the new Trust Law should regulate the basic trust relationship or regulate exclusively the trust business. A certain consensus had been reached in the NPC regarding the framework of the Trust Law: a law which regulates the basic trust relationship should be adopted first, while the specification of the functions of the trust institution, their business scope and the problem of supervision shall be left to the State Council to be regulated by different norms. Then once practical experience is gathered, further legislation shall be enacted. Finally, the Trust Law of China containing basic trust relationship regulations was enacted in 2001.51 The Trust Law of China has a total of 74 articles and is divided into seven chapters as follows: Chapter One, General Provisions; Chapter Two, Creation of Trusts; Chapter Three, Trust property; Chapter Four, Trust Parties; Chapter Five, Variation and Termination of Trusts; Chapter Six, Charitable Trusts; and Chapter Seven, Supplementary Provision.52

2.1.5

Modern Chinese Law Established on Civilian System

Although over 5000 years of history makes China classified as one of independent legal tradition in the world,53 Chinese law has experienced a comprehensive westernization since late Qing Dynasty (at the end of nineteenth century), to meet the demand of the legal system reform. This resulted in a dramatically different legal system from its traditional one.54 It is generally acknowledged that modern Chinese private law has been established largely on civil law models.55 The first attempt in Chinese legal history to

51

Bian (2002). Chapter Seven of Chinese Trust Law comprises only one article, namely, Article 74, which provides for the date from which the Law came into effect. 53 Zweigert and Kötz (1998). 54 Chen (2010), pp. 160–164. 55 Searching from the literature databases in China, numerous books and papers that illustrate the civil law tradition of Chinese current legal system can be found. 52

2.1 Background of Chinese Trust Law

23

establish a civil code was the Draft Civil Code of the Great Qing by the late Qing government since 1907. It is notable that the civil code used the archetype of the German model via Japan.56 Although the Qing’s Draft Civil Code never came into use, it laid the foundation for the codes based on European legal system to be used in the future to develop a set of Chinese Civil Laws. It was not until 1930 that the first Chinese Civil Code was promulgated. Having revised and reexamined the Qing’s Draft Civil Code, the Drafting Committee of the Republic of China57 drew on the experiences of Roman law countries such as Germany, Japan and Switzerland to develop its civil law legislation.58 Since the People’s Republic of China (PRC) was founded in 1949, social, political and economic conditions have substantially changed in China. In February 1949, the Communist Party of China (CPC) Central Committee announced the abolition of the legal system of the Republic of China. A tentative policy consensus was reached among government officials about the need to reform the state-planned economy and build a legal system that would support economic growth.59 Since 1978 when the Economic Reform and Open Door Policy60 was launched by the leader of China, Deng Xiaoping (邓小平), the reconstruction of Chinese legal framework has been put on the agenda of the National People’s Congress of China (全国人民代表大会). Although China inevitably learned from both common law systems and civil law systems when developing its modern legal system, if its private laws newly established since 1978 are carefully scrutinized, the civil law tradition can be identified, because of the influence of pre-1949 legal westernization in China.61

56 Chen (2010), pp. 163–164. (“It followed the German Bürgerliches Gesetzbuch (Civil Code, BGB) by dividing the code into five books, namely ‘General Principles’, ‘Law of Obligations’, ‘Law of Things’, Family’ and ‘Succession’. In addition, the Qing Civil Code Draft followed the German approach when it separated the civil code from a special commercial code.) (There is little wonder that Chinese legislation and legal theory were influenced by Japan. Since modern Japanese law was introduced from Germany and to lesser extent from France Japanese law, indirectly, has a Roman law tradition. Chinese law trod, though perhaps lightly, almost the same path as Japan in adapting the Continental Civil Code to its own eastern legal tradition.”). 57 China was governed by the Republic of China from 1912 to 1949. 58 Chen (2010), p. 169. (“This structure was exactly the same as the Qing’s Civil Code Draft and was passed down from the German model… [T]his early Civil Code (1929–1931) is still applicable in Taiwan despite numerous amendments since its enactment.”). 59 Potter (2004). Chinese Cultural Revolution (文化大革命) between 1966 and 1976 has a significant influence to the economy and society, where the attempt of establishing the principle of the rule of law was destroyed. It is after the Cultural Revolution that Chinese modernization returns to normal and has demonstrated rapid development. 60 Chen (2010). (Open doors to foreign investment, attracting foreign investment hinged on improving the legal system and placing a greater reliance on law. Civil law is the heart of a state’s system of regulations for business and property transactions as well as issues of liability.). 61 Chen (2010).

24

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Although the Draft Civil Code is still on the way as of today after several stops and restarts for various complex social and political reasons,62 the main parts of Civil Code has been legislated as separate laws, namely the General Principles of Civil Law (GPCL, No. 37 of 1986), Contract Law (No. 15 of 1999), Property Law (No. 62 of 2007), Marriage Law (No. 9 of 1980), Adoption Law (No. 54 of 1991), and Law of Succession (No. 24 of 1985).63 Chinese Trust Law was enacted in 2001, and it has been classified as a special law of Chinese Civil Law by Chinese legislators and scholars.64

2.2

Difficulties for Civilian Lawyers to Understand the Common Law “Trust”

The concept of “trust” is considered to be one of the creations by the common law system. Scholars in civil law countries have long shown the conflicts between the common law concept of trust and the civil law principles.65 This section first outlines the origin of trust law in common law system, then explains the recent trend in the reception of trust in a global context, and in the end of this section it discusses the main conflicts between trust law and civil law.

2.2.1

Trust Law: A Typical Common Law Construct

Trust is basically one of legal devices by which one person is enabled to own, manage, control and deal with property for the benefit of another person. Other such devices include agency and guardianship. However, the trust is peculiarly an outcome of the Anglo-American legal system. The law of trust originated and developed under the circumstance that in England there were separate courts of common law and chancery for centuries.66 After it is ruled by the common law courts in the thirteenth century that real property was not capable of being devised by will, lawyers of that time tried to avoid operation of this rule by having the owner of property transfer the property to a third party, under the proviso that the transferee hold the property for the use of 62

For the history and the reason why China chose civil law system as the model, see Chen (2010) (“After 1949, the first attempt to draft a civil code occurred in the 1950s, followed by attempts in the 1960s and again in the 1980s.”). 63 The structure of current draft civil code has a similarity with the German BGB. Law school students who are becoming the lawyers, judges and scholars in China are educated to be familiar with the traditional civil law doctrines and to think in the way of civil law logic. 64 See e.g. Wang (2008). 65 See Bolgár (1953). See also Lawson (1955), Koessler (2012). 66 Restatement of the Law Third, Trusts (US, 2003), Part 1 Chap. 1 IN NT.

2.2 Difficulties for Civilian Lawyers to Understand the Common Law “Trust”

25

Fig. 2.2 Devices of use

the transferor for his life, and upon his death for someone else designated by the transferor. The common law recognized the transferee as obtaining legal ownership of the real property through the conveyance, and yet the original owner of the real property retained the economic and personal benefits. After the death of the transferor, these benefits would shift to his/her successors. In the common law courts, when the owner of the trust property who had transferred his property to a “use” died, he/she owned nothing subject to the rules of succession.67 Without legal enforcement of the obligation and duty of the transferee, the devices of “use” (see Fig. 2.2) would have been vulnerable to abuse by the transferee. However, because the common law of contract had not yet been developed at the time of “use” was popular, the English courts could not enforce the obligation of the trustee to protect the beneficiaries’ interests. This is where the equitable jurisdiction of the Chancellor fills the gaps.68 If the transferee of the property in a “use” refused to respect and recognize the rights of the transferor or his successor, the Chancellor would compel the transferee to perform his/her duty expressed in the transfer. The common law courts would do nothing because the rights alleged in such context were not legal rights. However, the Chancellor enforced the duties, and as a result the “use” became a recognized form of conveyance. The Statute of Uses (1536) put a stop to the loss of revenue to the Crown caused by the “use” device.69 However, in order to circumvent this Statute, owners of properties transferred legal title in their real property to the transferee while the

67

See Pettit (1997), Riddall (1999). The King began referring such cases to the Chancellor, who had historically only a type of ministerial authority. But because the King and Council were the “supreme depositaries of power,” and the Chancellor’s authority was granted by the King, the Chancellor eventually began issuing decrees and doling out justice in ways not authorized by the common law. See Schenkel (2009). 69 Restatement of the Law Third, Trusts (US, 2003), Part 1 Chap. 1 IN NT. 68

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Fig. 2.3 Devices of trust

transferee had active duties to perform for the beneficiary. This scheme was recognized by the Chancellor, because the Chancellor ruled that the said Statute was intended only to execute “passive” uses (the mere holding of title). The fiduciary relationship between the trustee and the beneficiary which results from the separation of the legal and equitable interests in the property marked the beginning of the modern trust.70 Therefore, separate systems of enforcement (legal and equitable) conspired to the creation of the trust. If either system had not done its part, the beneficiary of the use would not have been able to enforce his/her interest and the scheme of use would not have worked. It is the unwitting combination of the common law with the Chancellor’s equitable power to enforce obligations based on nothing but moral obligations and good faith that created the trust.71 Another factor that is crucial to the development of the trust as a device for flexible, long-term management of family property has been the common law concept of future interests (see Fig. 2.3). Peculiar to such concept is a tolerance for time-divided ownership that permits a variety of present and future interests (legal as well as equitable), even in potential, unborn beneficiaries and including conditions and powers of appointment, which would surprise most lawyers in other legal systems. Flexibility is one of the most important characteristics of the trust device, both in the law and in practice.72 Moreover, mutual trust73 between owners of real properties and the distinguished persons or churches that are potential trustees is also indispensable for the development of trust in England. Since the trustee is recognized as the owner of real property by the common law courts, the land owner may be hesitated to transfer the land to the trustee unless there is a certain degree of trust between them. Similarly, 70

Andersen and Bloom (2012). Schenkel (2009). 72 Restatement of the Law Third, Trusts (US, 2003), Part 1 Chap. 1 IN NT. 73 Mutual trust is a sociological concept. For more details, see Chap. 4. 71

2.2 Difficulties for Civilian Lawyers to Understand the Common Law “Trust”

27

the institutionalized trust74 in the Chancellor played a crucial role in the development of trust. Going to the Chancellor or the equitable court was the only way for the beneficiary to get remedies from the trustee in breach of trust. People’s confidence on the legal system in England made this legal device possible to exist and develop for centuries.

2.2.2

Trend in the Reception of Trust All Over the World

The trust in England had been employed as the vehicle for estate planning by English farmers and then by urban middle-income people for centuries. Before the mid-twentieth century, for common law lawyers, trust had been related to testamentary and inter vivos personal or family trusts.75 However, nowadays, trust is used not only for family settlements during life and for the flexible disposition of decedents’ estates, but it also is used in many kinds of commercial transactions and business relationships, such as trust of receivables, business trust etc., and collective fund trust.76 Commercial trusts are now widely utilized in many jurisdictions that have a developed financial infrastructure (e.g. US, UK, Japan, Canada, Australia, China, Hong Kong, Singapore etc.). Trust confers significant advantages for commercial trading and corporate transactions. It provides protections from the insolvency of the trustee and the highest required standards of management performance of the trustee. For example, trust funds are required to separate from other assets of the trustee, and are off balance sheet of the trustee, which makes the trust funds immune from the insolvency, bankruptcy, or the claim of private creditors of the trustee. European civil law countries made great efforts in embracing the trust, partially due to the demand for trust as a legal vehicle for professional financial management, and partially because of the pressure within the European Community to reduce the barriers among the private law systems of the member states, particularly between the common law and civil law systems.77 The efforts in Europe lead the trend of reception of trust in the global context. By the year 2000, except for the main common law jurisdictions (such as England, US, Canada, Australia, Hong Kong, Singapore, India), up to 53 jurisdictions in the world have laws expressly or impliedly providing for the trust, and the number is going up.78

74

For the explanation of institutionalized trust, see Chap. 4. Waters (2007). 76 Restatement of the Law Third, Trusts (US, 2003), Part 1 Chap. 1 IN NT. 77 von Bar and Clive (2010). 78 See Waters (2006). 75

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28

2.2.3

The Conflicts Between Common Law Trusts and Civil Law

As many civilian scholars observed, the civil law lawyers have difficulties to understand the common law trust, let alone adopt it into domestic law.79 It also makes common law scholars to reconsider the cores and inessentials of trust.80 There is an ongoing debate among scholars as to what are the core elements of the common law concept of Trust.81 However, according to the academic commentaries regarding the nature of the common law trust, four main features might be discerned: the transfer of legal ownership of the trust property from the settlor to the trustee; the segregation of trust property from other assets of the trustee; the imposition of fiduciary duties on the trustee; and the equitable tracing of the property, followed by the imposition of proprietary remedies on third party recipients who are not bona fide purchasers for value without notice.82

79 See Waters (2006). See also e.g. Bolgár (1953), Martinez (1981), Lepaulle (1927), Keeton and Sheridan (1976), Banakas (2006), Lawson (1955). 80 See Honoré (2003), Hayton (1996), Koessler (2012). 81 Banakas (2006); see also Hayton (1996). As Professor Hayton suggested, the irreducible core of the Anglo-American Trust includes:

(i) assets which form an estate or patrimony separate from that of the settlor or trustee, and unreachable for the spouse, other relatives or creditors of the trustee; (ii) trustees to administer and manage the assets for the benefit of a beneficiary or, in the case of charitable trusts, a beneficial purpose; (iii) a defined purpose other than the benefit of the trustee; (iv) a court or administrative authority with a supervisory jurisdiction that can be called on to intervene, at least if the beneficiaries or, in the case of charitable trusts the public interest represented by an official, so wish, to ensure that the trustees do their job properly in fulfilling the purpose of the Trust; (v) legal title of ownership vested in the trustee8; (vi) equitable or beneficial ownership vested in the beneficiary, with the right of tracing the assets in the hands of third parties; (vii) intentional trusts can be oral or even secret; (viii) constructive trusts may be imposed ex post facto by the courts on parties without their consent, most notably in the process of tracing trust property; (ix) as the assets settled on trust are out of circulation, trusts cannot exist in perpetuity except charitable trusts so authorised by the State; (x) third parties who deal with the trustee in trust property acquire property interests only if they have purchased from the trustees directly for value and without notice (ie in good faith); if trust property has been passed on by the trustees to a third party without these conditions being present, subsequent purchasers are not protected against the beneficiary’s undeclared equitable interest and will be holding such assets in a (constructive) trust for the benefit of the beneficiary, unless any such purchasers can show that they purchased bona fide and for value. 82

Ho (2004), see also Meng (2015), p. 493.

2.2 Difficulties for Civilian Lawyers to Understand the Common Law “Trust”

29

Common law lawyers generally consider the “dual ownership” (legal and equitable ownership) as a key concept of trusts, however, in some civilian scholars opinion, trust existing for a purpose must be only temporary and must come to an end when the purpose of the trust has been fulfilled. They contend that temporary ownership is not consistent with the principle of the unlimited powers of the legal owner in civil law systems.83

2.3 2.3.1

Significant Problem: Focusing on Article 2 of Chinese Trust Law Legal Uncertainty Regarding the Ownership of Trust Property in China

China also needs to solve the conflicts between trusts and civilian legal principles when transplanting trust law in 2001. Article 2 of the Chinese Trust Law defines a trust as an arrangement whereby “the settler, on the basis of confidence on the trustee, entrusts certain property rights it owns to the trustee and the trustee manages or disposes of the property rights in its own name in accordance with the intentions of the settler and for the benefit of the beneficiary or for specific purposes.”84 It requires the settlor “entrusts” rather than “transfer”85 his property rights to the trustee. The requirement of transfer of ownership was replaced in the last circulated draft of the Chinese Trust Law by the equivocal terminology of “entrust”.86 If the word “transfer” is used in this Article, the ownership of trust property has to be assigned from the settlor to the trustee in order to establish a trust. At the time when the Trust Law was drafted, Chinese authorities worried that the requirement of transfer of ownership of trust property might have a negative implication on the practice. According to their contention, under this requirement, people are likely to be hesitated to enter into a trust contract with trust institutions, because of the risk of losing their ownership of property. The use of the word “entrust” raises the question as to whether it suggests an absence of vesting of property rights in the trustee (or whether the settlor remains his ownership on trust property when establishing a trust). Some scholars argue that the use of “entrust” causes the ambiguity or is even a failure of legislation. It is now

83

Banakas (2006). Cai (2008). 85 “Transfer” in Chinese is “转让”. Typically, under a sales contract, the seller transfers the ownership of the goods to the buyer, and the buyer transfers the money to the seller. 86 Ho (2012), p. 201. For more details, see Bian (2002), pp. 255–278. 84

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2 Trust Law of China and Its Uncertainty Regarding the Location …

unclear whether, in light of the inconsistencies between the provisions themselves,87 it is necessary for the law to define that the settlor shall transfer ownership of the relevant property in order for the trustee to set up a trust.88 Then, there may be two kinds of trust scheme in Chinese Trust Law: one that involves the transfer of the settlor’s ownership in the underlying trust property to the trustee, and another that does not. If the trust property is not registrable, such as money or tangible movable property (but for automobiles, ships, aircrafts, etc. subject to registration similar to real estate), and the settlor does transfer the property to the trustee, the trustee will appear to the public as if he is the full owner. This is because under Chinese Property Law, the rights of ownership comprise the rights of possession, use, beneficial enjoyment and disposal of the property.89 Once a settlor transfers such types of property to the trustee by means of giving the possession and use of the trust property to the trustee, the trustee will have all the external representations of ownership provided in the Property Law. Moreover, the Chinese Trust Law also clearly grants the trustee the right to manage and dispose of the trust property. It is true that the trustee’s rights of possession, use and disposal of the property are qualified by the beneficiaries’ right to beneficial enjoyment of the property, however, such beneficial rights are not visible to the public. Accordingly, the trustee is indistinguishable from a full owner, at least from the perspective of a third party who would become possible assignee of the same trust property. On the other hand, where the trust property is registrable, such as rights in relation to land or house or automobiles, ships, aircrafts, etc., there needs to be trust registration to make trust public to a third party. However, as of today, there are no further rules about the details of trust registration in China. One can only speculate that any such registration system will at least involve revealing and disclosing or publicizing that the trust property is subject to a trust. Under such conditions, the trustee’s apparent ownership will be significantly qualified by trust, because any third parties dealing with the trustee will know that his/her rights over the trust property are subject to the trust. For example, it would be made clear to the public that the trust property will not fall within the bankruptcy properties of the trustee when it is bankrupted; or the personal creditors of the trustee cannot assert claims on the trust property when the trustee is insolvent. Comparatively, according to Japanese Trust law, the ownership of trust property is clearly vested to the trustee,

87

More details in Chap. 3. For example, Article 15, 20, 28, 29, 30 are inconsistent with Article 14, 16 of Chinese Trust Law. 88 Ho (2004). 89 Property Law of the People’s Republic of China (2007), official English translation available at http://www.npc.gov.cn/englishnpc/Law/2009-02/20/content_1471118.htm (last accessed on June 14, 2015).

2.3 Significant Problem: Focusing on Article 2 of Chinese Trust Law

31

and the registration of trust is a matter of whether the parties to trust can claim to a third party, rather than a matter of the establishment of trust.90 Alternatively, a settlor may retain his/her ownership of the trust property, entrusting his rights of the property to the trustee. However, the distinction between this form of trust and an agency relationship is fuzzy. Theoretically, such trusts are distinguishable from agency relationship, on the grounds of that: (1) the trustee has a general management power on the trust property, while the agent only has limited power granted by the principal; and (2) the trust property is supposed to be segregated from the settlor’s own property, while the principal continues to own property entrusted to the agent, without distinction from his/her general properties. However, the first distinction is only in respect of the scope of the trustee’s and agent’s power on the property. It is difficult for the court and also a third party to distinguish them from each other, when a principal grants a general power to the agent. For the second difference, although the Trust Law provides for segregation of the trust property from the settlor and the trustee’s own assets, there is no further detailed instructions as to how this is to be achieved and made visible to the public.

2.3.2

Practical Problems Caused by Article 2 of Chinese Trust Law

Although there is very few trust case in China, the Chinese courts have shown different understandings concerning the location of ownership of trust property. In the case Shandong Food Co. Ltd. v. Jinan Yingda International Trust and Investment Co, Ltd. (2001) (hereinafter referred as Shandong Food v. Jinan Yingda, see Fig. 2.4),91 the court ruled that under a trust contract, the trust property is owned by the trustee, and therefore the investment risk of the trust property should be taken by the trustee. In the decision, the court explained that:

90

See Article 14 of Japanese Trust law (in its original language) 登記又は登録をしなければ権利の得喪及び変更を第三者に対抗することができない財産に ついては、信託の登記又は登録をしなければ、当該財産が信託財産に属することを第三者 に対抗することができない。 Its translation into English, available at http://www.japaneselawtranslation.go.jp/law/detail/? id=1936&vm=04&re=02 Accessed 16 July 2015. With regard to any property for which the acquisition, loss, and modification of any right may not be duly asserted against a third party unless it is registered, the fact that such property belongs to the trust property may not be duly asserted against a third party unless the fact that the property is under the trust is registered.

91

The Court of Shizhong District, Jinan, Shangdong, First Instance Civil Case No. 1707 (2001).

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2 Trust Law of China and Its Uncertainty Regarding the Location …

Fig. 2.4 Illustration of Shandong Food v. Jinan Yingda In a trust, as the owner of the trust property, the trustee acts in his/her own name to a third party. The rights and legal obligations deriving from these acts should bind the trustee rather than the settlor. The difference between a trust and an entrustment contract lies in the transfer of the ownership of the property. Transferring the ownership of the trust property from the settlor to the trustee is essential in creating a trust, while the ownership of the property is held by the principal in an entrustment contract. In this case, it is Jinan Yingda who makes all the decision on the investment of the fund, rather than following the instruction of the settlor. Therefore, the ownership of the fund can be deemed as being transferred from Shandong Food to Jinan Yingda, and the agreement between them is a trust contract. … Jinan Yingda should take the risk for the investment of the fund, and shall return a same sum of money with interest to Shandong Food. (Translated by the author.)

However, in case Beijing Haidian Science & Technology Development Co Ltd v Shenzhen Xinhua Jinyuan Investment and Development Co., Ltd. and others (hereinafter referred as Beijing Haidian v. Shenzhen Xinhua, see Fig. 2.5),92 the court commented that even if ownership of the trust property has been transferred to the trustee, the settlor is the owner of the trust property. The judgement of this case explains that: According to the Chinese Trust Law, the settlor entrusts, rather than transfer, the trust property to the trustee when establishing a trust. Meanwhile, the wording of “the settlor’s trust property” in Article 28 and 29 of Chinese Trust Law also indicates that the settlor is the owner of trust property. … Though the Trust Law and other relevant laws do not regulate transfer of the settlor’s rights, they do not expressly prohibit it… Those contracts [between the original settlor and Beijing Haidian] do not breach any laws or mandatory provisions under administrative regulations, and do not violate others’ legal rights. Moreover, they were recognized and registered by the Xinhua trust and further served to the China Banking Regulatory Commission’s office at Chongqing. Hence, the contracts shall be valid. (Translated by the author.)

These two cases represent two typical different understandings of Article 2 of Chinese Trust Law as well as the concept of trust. In the author’s opinion, in Shandong Food v. Jinan Yingda, the court conveyed a misunderstanding of the concept of trust. 92

Chongqing High People’s Court First Instance Civil Case No. 14 (2006).

2.3 Significant Problem: Focusing on Article 2 of Chinese Trust Law

33

Fig. 2.5 Illustration of Beijing Haidian v. Shenzhen Xinhua

According to the decision of the court in this case, after the establishment of a trust, the ownership of trust property is transferred from the settlor to the trustee, therefore, all the legal effects concerning the trust property bind the trustee rather than settlor, and the trustee should return the trust property to the settlor when the trust is terminated. This understanding does not comply with the function of the mechanism of the trust in the conventional understanding in China. It is generally understood that the trust property should be independent to all the parties to a trust relationship, thus the loss of the property should be taken by the trust property itself, rather than being compensated by the trustee’s own assets. Regarding the case Beijing Haidian v. Shenzhen Xinhua, in the author’s point of view, the decision was relatively reasonable. It is noted that the court commented in the decision that “for the relationship among the internal parties (settlor, trustee, and beneficiary) to a trust, it does not matter who is the owner of the trust property, as long as the rights and duties among them are clearly defined. The issue on the location of the ownership of trust property becomes important when a third party assert claims concerning the trust property.”

2.4

Interim Conclusion

This chapter has outlined the historical background of Chinese Trust Law and its uncertainty regarding the location of ownership of trust property. It described the development and problems of trust and investment companies in modern China,

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2 Trust Law of China and Its Uncertainty Regarding the Location …

and the five rounds of nationwide clearing and rectification of trust business in 1982, 1985, 1988, 1993 and 1999 respectively. This chapter found that it is widely admitted that the existence of the trust phenomenon in China is an indisputable fact. In addition, trust was demanded in the large scale of the potential wealth management market in China, because there has emerged a comparatively large property market requiring external management. This chapter also explained why it has been widely accepted that the most important cause of the problems of trust industry in China was the lagging legislation and the lack of needed legal regimentation and protection for the trust industry; and then this chapter described the legislative procedure of the trust law in China, and explained the civil law tradition of Chinese legal system. Then this chapter outlined the origin of trust law in common law system, and the recent trend in the reception of trust in a global context, and then discusses the conflicts between the concept of “trust” and conventional way of thinking by lawyers of civil law jurisdictions. This chapter also explained the main obstacles to the reception of the trust in modern civil law, which are: a conception of absolute ownership; the principle of numerus clausus of property rights; the principle of publicity of property rights; a variety of devices serving to a degree the same functions as trusts. Finally, this chapter focused on Article 2 of Chinese Trust Law, explaining why the terminology of “entrust” in this article caused uncertainty regarding the location of the ownership of trust property. It also outlined the theoretical and practical problems accompanied with it. Theoretically, it is difficult to interpret the trust law regarding the location of ownership of trust assets. Either of the settlor, the trustee, and the beneficiary can be interpreted to be the owner of trust property in the context of Chinese Trust Law. Practically, through two cases and two types of trust business, this chapter explained that different courts or different types of trust business deal with the ownership of trust property in totally different approaches.

References Allen F, Qian J (2014) China’s financial system and the law. Cornell Int Law J 47(3):499–553 Andersen RW, Bloom IM (2012) Fundamentals of trusts and estates, 4th edn. LexisNexis, New York Banakas S (2006) Understanding trusts: a comparative view of property rights in Europe. InDret 323(1):1–9 Bian Y (ed) (2002) Zhonghua renmin gongheguo xintuofa shiyi (Annotation of the trust law of the People’s Republic of China). Law Press China, Beijing Bolgár (1953) Why no trusts in the civil law? Am J Comp Law 2(2):204–219 Cai G (2008) Dulixing dengji: xintuo dengji de chuangxin tujing (Registration on the independence of the trust property: an innovative approach for the trust registration). http:// finance.sina.com.cn/stock/t/20080228/02422028674.shtml. Accessed on 13 June 2015 Chen L (2010) The historical development of the civil law tradition in China: a private law perspective. Legal Hist Rev 78:159–181 D’Angelo N (2014) Commercial trusts. LexisNexis, New York

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Farley M (1999) Chinese investment firm Gitic collapses. http://articles.latimes.com/1999/jan/12/ business/fi-62726. Accessed 16 July 2015 Fisher HAL (ed) (1911) The collected papers of Frederic William Maitland, 3 vols. CUP, Cambridge Gebhardt I, Hanisch H (2002) Development of Chinese trust law: an overview. In: Zhu SP et al (eds) The Chinese trust law: materials on the drafting process. Publishing House of the Supreme Chinese Procuratore, Beijing Graziadei M, Mattei U, Smith DL (2005) Commercial trusts in European private law. CUP, Cambridge Hansmann H, Mattei U (1998) The functions of trust law: a comparative legal and economic analysis. N Y Univ Law Rev 73(2):434–479 Hayton D (1996) The irreducible core content of trusteeship. In: Oakley A (ed) Trends in contemporary trust law. OUP, Oxford Ho L (2004) The reception of trust in Asia: emerging Asian principles of trust? Singap J Legal Stud 2004:287–304 Ho L (2012) Trust laws in China. In: Smith L (ed) Re-imaging the trust: trusts in civil law. CUP, New York, pp 183–221 Honoré T (2003) Trusts: the inessentials. In: Getzler J (ed) Rationalizing property, equity and trusts: essays in honour of Edward Burn. Butterworths, London Jiang P, Zhou X (1994) Lun zhongguode xintuo lifa (The enactment of the trust law in China). China Legal Sci 6:53–59 Keeton GW, Sheridan LA (1976) The comparative law of trusts in the Commonwealth and the Irish Republic. Barry Rose, Chichester Koessler J (2012) Is there room for the trust in a civil law system? the French and Italian perspective. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2132074. Accessed 25 June 2015 Lawson FH (1955) A common lawyer looks at the civil law. University of Michigan Press, Ann Arbor Lepaulle P (1927) Civil law substitutes for trusts. Yale Law J 36:1126 Martinez I (1981) Trust and the civil law. La Law Rev 42:1709 Meng Z (2015) Should China clarify the ownership of trust assets? A social network perspective. Trusts Trustees 21(5):492–500 Pettit PH (1997) Equity and the law of trusts, 8th edn. OUP, Oxford Potter PB (2004) Legal reform in China: institutions, culture, and selective adaptation. 29 Law & Soc. Inquiry 29(2):465–495 Riddall JG (1999) The law of trusts, 4th edn. OUP, Oxford Schenkel KD (2009) Trust law and the title-split: a beneficial perspective. UMKC Law Rev 78:181–214 Schwarcz SL (2003) Commercial trusts as business organizations: unraveling the mystery. Bus Lawyer 58(2):559–585 Trust and Fund Research Institution (2012) Zhongguo xintuoye fazhan baogao 2012 (Chinese Trust Industry Development Report 2012). Economic Press China, Beijing von Bar C, Clive E (eds) (2010) Principles, definitions and model rules of European private law: draft common frame of reference. OUP, Oxford Wang L (2002) Urgent need for Chinese trust law. In: Zhu SP et al (eds) The Chinese trust law: materials on the drafting process. Publishing House of the Supreme Chinese Procuratore, Beijing Wang Y (2008) Lun xintuofa yu wuquanfa de guanxi: xintuofa zai minfa faxi zhong de wenti (Relationship between trust law and property law: toward the questions of trust law in civil law system). J Peking Univ (Philo Soc Sci) 6:93–101 Waters D (2006) The future of the trust (Part I). J Int Trust Corp Plan 13(4):179–223 Waters D (2007) The future of the trust (Part II). J Int Trust Corp Plan 14(1):1–22 Zhou X (2002) The practical significance of establishing a trust system. In: Zhu SP et al (eds) The Chinese trust law: materials on the drafting process. Publishing House of the Supreme Chinese Procuratore, Beijing Zweigert K, Kötz H (1998) Introduction to comparative law (trans: Weir T), 3rd edn. OUP, Oxford

Chapter 3

“Dual Ownership” Versus “Absolute Ownership”: A Comparative Analysis

Abstract This Chapter provides a comparative analysis on the diverse approaches in which the civil law countries deal with the issue regarding the ownership of trust property. The basic concepts of the “dual ownership” and “absolute ownership”, and the conflict between these two concepts are elaborated in the first section of this Chapter. Then, this Chapter outlines the different scenarios regarding the ownership of trust property in China. Specifically, it examines various conventional interpretations of Article 2 of the Chinese Trust Law suggested by Chinese legal scholars. Further, this Chapter moves on to explain the approaches adopted by the so-called “mixed jurisdictions” such as Scotland, Quebec, Louisiana, and South Africa; also, the trust laws in East Asian jurisdictions such as Japan, Korea, and Taiwan are overviewed. This Chapter ends with a critical summary of the existing debates. It is widely considered by legal scholars that the “dual ownership” concept is a key feature of common law trust. The central element of common law trust is that the trustee obtains legal ownership of and title to trust property by the establishment of the trust, whereas beneficial ownership/title to the same trust property is transferred to the beneficiary. English trust developed with a history of split court system (i.e. courts of common law and courts of equity) as outlined in Sect. 2.2.1, above. Trusts were enforceable1 in courts of equity but generally not in courts of common law. The common law recognized the trustee as the owner at common law, but providing no remedy for the beneficiary. To the public, the trustee is the full owner of the trust property, he can use, manage and dispose the trust property in his own name, nobody else has the rights to interfere the trustee’s power on the trust property (for example, to demand the trustee to withdraw a disposition of the trust property, or to claim obtaining interests of the trust property). The courts of equity developed remedies for the beneficiary to fulfill trusts, including the beneficial ownership. In 1

The beneficiary can claim its rights on the trust property against the trustee (for example, to demand the trustee to withdraw a wrongful disposition of the trust property, to request the trustee to claim the compensation from the loss of the trust property etc.) only in courts of equity other than in courts of common law. © Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2_3

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3 “Dual Ownership” Versus “Absolute Ownership” …

order to compel the trustee to fulfill the trust in the best interests of the beneficiary, English law split the ownership of the trust property between a trustee and a beneficiary.2 However, this “dual ownership” mechanism is deemed to run counter to important civil law principles, particularly the theory of “absolute ownership.” Ownership is absolute and indivisible which is required by civilian tradition. Establishment of a trust would impose an in rem3 burden on the trust property. However, since no civil code in civil law jurisdictions includes the trust among its types of iura in rem,4 the trusts cannot have in rem effects. According to the principle of numerus clausus in civil law, property rights in all forms shall be created and regulated by legislations rather than by the parties to legal relationships. This tension between the concept of trust and the traditional civil law principles makes the location of ownership of trust property a difficult issue for civil law legislators.

3.1 3.1.1

Conceptualization of “Dual Ownership” and “Absolute Ownership” The Development of the Concept of “Dual Ownership” in Common Law

As discussed in Sect. 2.2.1 above, English trust grew up under the aegis of a split court system (courts of common law and courts of equity).5 Trusts were enforceable in courts of equity as explained below, generally not in courts of common law. There are no restrictions upon the trustee’s ownership of trust property at common law. For example, Anna assigned her land to Bob for the purpose of trust, requesting Bob to manage the land for the benefit of Cindy. If Bob makes profit from this land for the benefit of himself, Cindy cannot claim her own rights on the land against Bob in courts of common law, because the trustee is deemed as full owner of trust property, therefore, the act that Bob uses the land for the benefit of himself is valid in common law court. In contrast, in equity, the trustee is required to exercise his/her rights as owners for the benefit of the beneficiaries.6 Therefore,

2

Restatement of the Law Third, Trusts (US, 2003), Part 1 Chapter 1 IN NT. In Roman law, the term “in rem” refers to a lawsuit or other legal action directed toward property. It is different from “in personam,” which is directed toward a particular person. 4 According to Roman law, “iura in rem” refers to rights available against all, while “iura in personam” refers to rights available only against a specific person or group of persons. See Buckland (2012), p 41. 5 Schenkel (2009). 6 See Restatement of the Law Third, Trusts (US, 2003), Part 1 Chapter 1 IN NT; Pettit (1997), Riddall (1999). 3

3.1 Conceptualization of “Dual Ownership” …

39

Cindy can sued Bob to the Chancellor, claiming that Bob’s action of making profit from this land for the benefit of himself is invalid. This split of court system in England predictably gave rise to a terminology of common law and equitable obligations, common law and equitable interests in property, and ownership at common law and in equity.7 The terminology of “dual ownership” emerged in the response of this specific situation of trust, which means that the trustee’s ownership rights of trust property are enforceable in common law courts, while the beneficiary’s ownership rights of trust property are enforceable in the courts of equity. For example (see Fig. 3.1), Anna entered a sales contract with Bob to sell her apartment to Bob. However, before Anna’s transferring the ownership of the apartment to Bob, Anna sold the same apartment to a bona fides third party8 Cindy, and transferred the ownership of apartment to Cindy. In the court of common law, Bob can only get remedy against Anna’s liability for breach of contract (upon the contract, Anna is imposed a duty to transfer the ownership of the apartment to Bob and conduct the registration of such transfer), such as to claim against Anna damages due to Bob’s breach of the contract entered between Bob and a third party for the purpose of leasing this apartment to the said third party. However, in the court of equity, the relationship between Anna and Bob in such a case is deemed as a trust, in which Anna is deemed to be the trustee of Bob. As a trustee, Anna sold the apartment to Cindy for the benefit of Bob. Hence, Bob is considered to be the equitable owner of the apartment, and he/she has the right of recourse of the payment of the apartment that C paid to A. However, even in the common law jurisdictions, it was observed in the beginning of twentieth century that the concept of “beneficial ownership” is undergoing a changing development, from the rise to the decline with the time passes by. Initially, the beneficial rights under a trust were not considered as property rights. In an English trust in nineteenth century, the trustee was obligated to utilize the trust property for the benefit of the beneficiaries. It was an equitable obligation that obliges the legal owner (the trustee) of the trust property to exercise his/her legal ownership for the benefit of the beneficiary or to achieve particular purposes pre-fixed by the trust contract or the will of the settlor. The beneficiary can only go to the courts of equity to enforce such an obligation against trustee, while the beneficiary cannot assert real claims9 against trust property held in the hands of the

7

Honoré (2003). A bona fide third party (referred to more completely as a bona fide purchaser for value without notice) is a term used in the law of real property to refer to an innocent party who purchases property without notice of any other party’s claim to the title of that property. A bona fide purchaser must purchase for value, meaning that he or she must pay for the property rather than simply be the beneficiary of a gift. 9 Real claims are based on property rights with real effects on a thing, such as excluding others from enjoying the property, decide how a piece of real property is used, transfer (alienate) some or all of these rights to others on mutually agreeable terms. 8

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3 “Dual Ownership” Versus “Absolute Ownership” …

Fig. 3.1 Illustration of the case above

trustee or third parties.10 However, these rights evolved and came to be accepted as proprietary rights, and finally under some circumstances as ownership rights.11 Holding a proprietary right of a property enables the beneficiary to have exclusive power on the trust property. For example, if trust property has been wrongfully12 transferred from the trustee to a third party, the beneficiaries can rescind the wrongful disposition.13 During nineteenth century in Europe, only another form of ownership—beneficial ownership—was thought sufficient to restrict the legal owner’s (the trustee’s) rights. In the court of equity, the beneficiary of a trust is deemed as the owner of the trust property. For the trustee’s legal ownership, there are plentiful precedents to follow in the common law. In contrast, the number of cases on the beneficial ownership is much less than cases on legal ownership, the Chancellor in equity courts makes decisions on the specific rights of beneficial ownership according to his/her discretion.14 The concept of beneficial ownership has prevailed over the last two centuries. By having the beneficial ownership, the beneficiaries of a trust may, for example, exclude the third parties from interfering with their right to beneficial enjoyment,15 or terminate the trust and compel the trustee to transfer the trust fund

10

Watkin (2007). Watkin (2007). 12 “Wrongful act” is an act that will damage, physically or emotionally, another person (Black’s Law Dictionary). For example, the trustee transfers the apartment under a trust to a third party (the related party of the trustee) at an unjust price, so that the trustee and/or the related party can get benefit from the transaction. 13 Pettit (1997), See also Smith (2013). 14 Watkin (2007). 15 For example, according to the terms of trust contract, the trustee should distribute annual interests of the trust property to the beneficiary, however, creditors of the trustee may claim that such distribution will damage their interests. As the beneficial owner, the beneficiary can exclude such interference of a third party. 11

3.1 Conceptualization of “Dual Ownership” …

41

to the beneficiaries, or prevent the trustee’s personal creditor to assert claims on trust property.16 The concept of “dual ownership” of the trust property was eventually formulated in common law. Trust permits a division in the ownership of the trust property between a trustee and a beneficiary so that the trustee is compelled to act entirely in the best interests of the beneficiary regarding the management of trust property.17 The trustee obtains appropriate control over the trust assets in order to manage them effectively, whereas the beneficiaries obtain the beneficial enjoyment of the property so as to check on the trustee’s powers to avoid abuses.18 Under the concept of “dual ownership”, the beneficiary of a trust has, for example, the power enforceable against the trustee to rescind the trustee’s wrongful disposition of the trust property such as transferring the trust property to a related party of the trustee at an unjust price, or the power enforceable against third parties to recourse the trust property if the trust property was claimed by third parties. The beneficiary cannot exercise such powers if its rights are deemed as creditor’s rights against the trustee.19 Moreover, a duty of separating the trust property from the trustee’s other properties is imposed on the trustee by common law.20 Additionally, if the trustee dies or disbands or terminates as a result of being canceled or being declared bankrupt according to law, the trust property shall not be deemed as his/her heritage or liquidation property.

3.1.2

The Concept of “Absolute Ownership” in the Civil Law Jurisdictions

Ownership has been considered to be absolute21 under the civil law tradition. According to the Roman Law in the Republican and Classical periods, the

16

For example, since the trust property is in the name of the trustee, if the trustee is insolvent, creditors of the trustee may file an application for court auction on the trust property. In such case, as the beneficial owner, the beneficiary of a trust can prevent such claims of the trustee’s personal creditor. 17 Hudson (2014), p. 41. 18 Gretton (2000). 19 Though under the Japanese Trust Law, the beneficiary’s rights are designed as creditor’s rights, the beneficiary is entitled very strong rights against the trustee including, for example, the right to demand compensation for a loss or restoration of the trust property, the right to file a petition with the court under the provisions of Japanese Trust Law, the right to assert an objection to the execution, provisional seizure, provisional disposition or exercise of a security interest, or auction of trust property etc. (Article 92 of Japanese Trust Law), almost close to the rights of ownership to some extent. 20 Hudson (2014). 21 See the explanation of “absolute ownership” in the following part of this Section.

42

3 “Dual Ownership” Versus “Absolute Ownership” …

ownership was absolute in the sense that the owner’s title was not merely better than all others, but the only title to a thing, namely, a person was either an owner or a non-owner to a thing. A creditor of the owner of a property is not an owner even though the contract between the creditor and the owner entitles the creditor to obligate the owner to, for example, transfer the ownership of the property to him/her. Because the creditor cannot obligate any other third party not to infringe the property rights. Moreover, the owner of a property had the absolute and unrestricted power of dealing with the thing, except for certain minor restrictions imposed by public law, the power of contractual obligations, and above all the absolute power of alienating it.22 This conception of ownership has passed into the modern civil law, though it sometimes causes difficulties. French Civil Code (1804) is an example employing this conception. According to Article 544 of the French Civil Code (1804),23 which is considered by legal scholars in civil law jurisdictions as the most well-known model for a civil law system in modern times, ownership includes a complete power of three types of rights over the thing: “the right to use the thing, the right to take its fruits, and the right to destroy or alienate it.” All these rights, in the classical model of ownership, belong to a single person regarding any particular thing.24 In its strictest sense, the concept of “absolute ownership” has the legal effect that the owner can possess, use, manage and dispose the thing with no restriction. Take the same scenario described above as an example, Anna made a sales contract with Bob to sell his/her apartment to Bob. However, before transferring the ownership of the apartment to Bob, Anna sold the same apartment to a bona fides third party Cindy, and transferred the ownership of apartment to Cindy. Under the principle of absolute ownership, Cindy is the owner of the apartment because the apartment is registered in the name of Cindy. Bob can get contractual remedies against Anna, such as asserting claims on damages caused by Anna’s breach of contract. This concept has been adjusted by modern legal theory, which means that the ownership of property can be restricted by other types of rights in rem such as easements rights,25

22

Lawson (1955). Article 544 of the French Civil Code (1804) in its original language: La propriété est le droit de jouir et disposer des choses de la manière la plus absolue, pourvu qu’on n’en fasse pas un usage prohibé par les lois ou par les règlements. Its English translation by Lionel Smith in Smith (2013), p. 319: Ownership is the right to use, enjoy and dispose of things in the most absolute manner, provided they are not used in a way prohibited by statutes or regulations. 24 Zhang (2015). 25 An easement is a right benefiting one parcel of land that permits the rightful users of that land to perform specified actions over a neighboring parcel of land. 23

3.1 Conceptualization of “Dual Ownership” …

43

rights to mortgage,26 and usufructuary rights27 etc. However, these restrictions must be explicitly provided by the law, rather than, for example, by an agreement between parties in a contract. In light of these traditional understandings, it is understandable that the civil law scholars feel unfamiliar with the concept of “dual ownership.” Basically, in common law jurisdictions, the trustee’s ownership rights to trust property are restricted by beneficiary’s ownership rights on the same trust property.28 Moreover, even where an order for the commencement of bankruptcy or rehabilitation proceedings is entered by a relevant court against a trustee, no property that belongs to the trust property shall be included in the bankruptcy estate or the rehabilitation creditor’s assets. In such cases, no distribution claim as a beneficiary shall be the bankruptcy claims, or be included in the rehabilitation claims. As some scholars pointed out, the equitable ownership rights in common law is narrower than absolute ownership in civil law.29 The beneficiary of a trust has, for example, the power enforceable against the trustee to rescind the trustee’s wrongful disposition of the trust property, or the power enforceable against third parties to recourse the trust property if the trust property was claimed by third parties, however, the power of equitable ownership is less than civil law ownership. Similarly, a trustee’s common law ownership is also narrower than an equivalent ownership in civil law.30 As leading civil law scholars emphasized, the understanding of “dual ownership” of trust property is of great significance for civil law jurisdictions in accepting trust: Perhaps the greatest difficulty the civilians have in accepting the trust is caused by an English peculiarity logically detachable from the trust, namely, the distinction between the legal and the equitable estate.31 The first and indeed basic obstacle of acceptance of the trust is the concept of autonomous and indivisible ownership.32 Perhaps the greatest obstacle to the adoption of the trust by any jurisdiction with a civilian legal tradition is the duality of ownership inherent in the common law trust.33

26

In order to guarantee the payment of debts, a debtor or a third party mortgages property to a creditor instead of transferring of the possession of such property. If the debtor defaults or the conditions for enforcement of the interest, as agreed upon by the parties concerned, arise, the creditor has priority in having his claim paid with the property. 27 A usufructuary has the rights to possess, use and benefit from the immovables or movables owned by another. 28 However, there are jurisdictions where the trustee is just subject to contractual obligation to the settlor. In such jurisdictions, the beneficiary does not have any rights in rem on the trust property. Additionally, the trust laws of civil law jurisdictions often seek the middle way by making trustee’s ownership right subject to fiduciary duties specifically provided by the Trust Law, as typically found in Japanese Trust Law (Article 29–47 of Japanese Trust Law). 29 See McAuley (2012), Lee (2009), Zhang (2015). 30 Zhang (2015), p. 504. 31 Lawson (1955), p 201. 32 Bolgár (1953). 33 Lorio (1982).

3 “Dual Ownership” Versus “Absolute Ownership” …

44

[T]he heart of the difficulty lies in the fact that trust property has two contemporaneous owners.34

Civil law jurisdictions and mixed jurisdictions have been working at their respective conceptualization of trust. As summarized by some scholars, those jurisdictions have gone in a different direction on how to cope with the absolute ownership principle of civil law. Some choose to remain exactly at all points within the ambit of the local civil code, others choose a departure from the local civil code but in one or two respects only, and still others just accept and brazen it out that trust scheme is “a drop of oil floating on a pool of water.”35 Apart from such efforts to accept trust from theoretical perspective, the legislations may also seek middle ways. For example, Japanese Trust Law specifically provides fiduciary duties of the trustee, which makes the trustee’s ownership of the trust property restricted by such fiduciary duties. Similarly, according to the Japanese Trust Law, the degree of strength given to beneficiary’s rights are more than the degree of ordinary creditor’s rights but less than the degree of ordinary ownership.

3.2

Debates Within Chinese Legal Circle Regarding Ownership of Trust Property36

The ownership of trust property is deemed by Chinese legal scholars as a challenge for the traditional understanding or concept of ownership in China. As Prof. Ho pointed out that “the Chinese Trust Law’s lack of guidance concerning the location of ownership of trust property to a judiciary that may not yet be familiar with the trust concept is regrettable.”37 In this regard, within Chinese legal circle, the approaches of interpretation in both the academic and practical fields differ from each other. Some suggest that the ownership of trust property remains at the settlor even after the establishment of trust, whereas the trustee manages the trust property on behalf of the settlor, and the beneficiary enjoys the beneficial interest which is a right of creditor against the trustee. Others argue that the ownership of trust property is transferred from the settlor to the trustee upon the establishment of trust, and the beneficiary’s right is either a new style of real right which enables the beneficiary to claim its rights on the trust property against the trustee or a third party, or a right of creditor which enables the beneficiary to obligate the trustee to manage the trust property for the benefit of the beneficiary. Still, others believe the beneficiary is the owner of the trust property. These different opinions and their

34

Gretton (2000). Waters (2006), p. 192. Professor Shinomiya who was a distinguished Japanese scholar described the Japanese trust as ‘unique and isolated in the Japanese legal system, like a drop of oil floating on a pool of water.’ 36 This part is a reproduction of a section in Meng (2016), pp. 94–103. 37 Ho (2004). 35

3.2 Debates Within Chinese Legal Circle Regarding …

45

expected legal consequences will be specifically explained in the following sections.

3.2.1

An Opinion Contending Settlor as the Owner of Trust Property

Some scholars contend that Article 2 of Chinese Trust Law is the most significant innovation of Chinese Trust Law.38 They argue that, according to Chinese Trust Law, the ownership of trust property remains with the settlor even after the establishment of a trust.39 In their opinion, under the Chinese law, “entrustment” is a concept typically used in an agency contract. For example, suppose that Anna entrusts Bob to sell the apartment of Anna. Now, Anna is deemed as the principal, and Bob is deemed as the agent. Therefore, in the deal of the sale of the apartment sale, Bob acts in the name of Anna, and all the legal effects of the sale contract will bind Anna, rather than Bob. If Bob sells the apartment to a bona fides third party Cindy in the name of Anna, in violation of the given authority or the will of Anna, the sale contract of the apartment shall be invalid. Also, Anna can claim to revoke the sale contract between Bob and Cindy. The definition of the “entrustment contract” indicates that there is no transfer of property from the principal to the agent in an agency arrangement.40 The word of “entrust” is also used in Article 30 of the Trust Law,41 where a trustee is permitted to “entrust” others to handle the trust affairs on his behalf. This appears to be a simple authorization of the rights to manage the trust property to a third party, without transferring the ownership to the trust property to such third party. Some Chinese scholars’ such understanding of Article 30 thus suggests that the transfer of trust property to the trustee is not required under Article 2 of Chinese Trust Law.42 Besides, those scholars presented

38

See Zhang (2007). See also Sese (1999). See Zhang (2007). 40 Article 396 of Chinese Contract Law provides that: 39

An entrustment contract is a contract whereby the principal and the agent agree that the agent shall handle the affairs of the principal. See also Lee (2009). Chinese Trust Law 2001, Article 30 provides that:

41

[T]he trustee shall handle the trust affairs in person, but if there are otherwise provisions in the trust documents or there is no alternative, the trustee may entrust others to handle the affairs on his behalf. The trustee shall bear liability for the handling of the trust affairs by others to whom he entrust the trust affairs. (Emphasis added.). 42

Lee (2009).

46

3 “Dual Ownership” Versus “Absolute Ownership” …

the proof that Article 20 of the Trust Law states that the settlor has the right to information related to “his trust property” (underline added by the author).43 Articles 2844 and 2945 also require the trustee to segregate his own property from “the trust property of different settlors” (underline added by the author). The former draft of this article, clause 25 of the April 2000 draft of the Trust Law, only refers to “the property of other trusts”, rather than that of the settlors.46 Literally, the wording of these articles can serve as evidences that the settlor owns the trust property after the establishment of trust. However, there are other provisions in the Trust Law that can be the evidences for the opposite opinion as set forth above. According to the argumentations of these scholars, in Article 15 of Chinese Trust Law, if the ownership of the trust property is deemed to be transferred to the trustee, the act of separation of trust property from the settlor’s own property would have been superfluous.47 There are provisions of the Trust Law (Article 20, 21, 22) which allow the settlor to retain extensive powers after the arrangement of establishing a trust, including power to manage the trust property, right to inspect trust documents, and even right to request the trustee to adjust the methods to manage the

43

Chinese Trust Law, Article 20 provides that: [T]he settlor has the right to know how his trust property is managed, utilized or disposed of and the income and expenses incurred therefrom, and has the right to ask the trustee to make explanations. The settlor has the right to consult, write down or duplicate the trust accounts relating to his trust property and other documents relating to the handling of trust affairs. (Emphasis added.).

44

Chinese Trust Law, Article 28 provides that: [T]he trustee may not conduct inter transaction between his own property and trust assets or between the trust assets of different settlors. (Emphasis added.).

45

Chinese Trust Law, Article 29 provides that: [T]he trustee shall administer the trust property separately from his own property and keep separate accounting books, and he shall do the same with regard to the trust property of different settlors. (Emphasis added.).

46

Ho (2012), p. 198. Chinese Trust Law, Article 15 provides that:

47

Trust property differs from other properties with which the trustor hasn’t established a trust. After the trust is established, if the trustor dies or disbands according to law, or is canceled or declared bankrupt according to law, and if the trustor is the only beneficiary, the trust shall terminate and the trust property shall be deemed as his heritage or liquidation property; if the trustor is not the only beneficiary, the trust shall continue to exist and the trust property shall not be deemed as his heritage or liquidation property; but if the trustor, as a joint beneficiary, dies or disbands according to law, or is canceled or declared bankrupt according to law, the beneficial right of the trust shall be deemed as his heritage or liquidation property.

3.2 Debates Within Chinese Legal Circle Regarding …

47

trust property. If trust property were vested in the trustee, the settlor should retain no (beneficial) interest that would allow him to interfere with the trustee’s management of the trust property. Rather, only the beneficiary has the rights to interfere the trustee’s management rights to the trust property. Further, these legal scholars concluded that the provisions reserving extensive powers for the settlor make it evident that even after the entrustment, the settlor remains to be the owner of the property entrusted. According to this understanding, the settlor may possess, use, manage and dispose the trust property even after the establishment of trust; the trustee actually functions as an agent of the settlor, although the trustee may manages or disposes the trust property in his/her own name. In case of wrongful disposition of trust assets by the trustee, the settlor may rescind the wrongful disposition. The trust property will not fall within the trustee’s bankruptcy estate, and cannot be seized by the personal creditor of the trustee. However, in some other scholars’ view, the power of the settlor on the trust property may be too strong. They explain that Article 15 of Chinese Trust Law requires the settlor to segregate trust property from his/her private property once a trust is established. The trust property shall not fall within the settlor’s bankruptcy estate, and cannot be seized by the personal creditor of the settlor as well, as long as it is segregated from other properties of the settlor. However, what if the settlor fails to meet this requirement in Article 15 of Chinese Trust Law? Because China has not yet established a registration system to make the trust public, it would be very common that, in the practice, the settlor has no means to notify his segregation to public. The difficulty for the trustee and beneficiary will be that they may not know whether the settlor has segregated the trust property because the segregation of the trust property is not visible to the public in China, until it is too late. From the perspective of a third party, the trust property without registration of segregation would be deemed as part of ordinary assets of the settlor. The settlor’s creditors may have recourse to the trust property in the event of the settlor’s insolvency. In light of this, some scholars criticize that if the settlor is considered to retain the ownership of the trust property, the conceptual and practical problems accompany with this understanding cannot be underestimated. They argue that, conceptually, the distinction between trust and an agency relationship is fuzzy.48 Also, these scholars contend that from the practical perspective, such an understanding of the trust is extremely inefficient in operation. First of all, if the trustee does not hold the ownership of trust property, the trustee’s power in managing the trust property will be significantly restricted. According to the Trust Law, the trustee shall manage the trust property in his own name. However, such lack of ownership of trust property will make it inconvenient for both the trustee and a third party when they want to enter into a legal relationship. For example, the owner of a piece of equipment

48

Ho (2012), p. 199.

48

3 “Dual Ownership” Versus “Absolute Ownership” …

Fig. 3.2 Illustration of the case of equipment leasing trust above

settled an equipment leasing trust, in which the trustee, in its own name, gives the lessee of such equipment the right to use the equipment for a specified period of time for an agreed upon payment (see Fig. 3.2). Accordingly, the lessee arranged the schedule to manufacture the productions utilizing the leased equipment from the trustee, and made a series of sales contracts with another party to sell these products in the future. However, the lessee would be subject to the risk that the equipment lease would be overturned by the settlor, if the settlor exercises his power as an owner of the leased equipment. Second, if the trust property is not segregated from other assets of the settlor, or is hard to be identified as a trust property, the scheme of a trust will become ineffective in order to achieve the purpose of the trustee’s professional management ability, because a third party needs to pay transaction cost to identify whether the property in transaction is trust property or not. If the trustee does not have ownership of trust property, one may wonder how the trustee is to discharge his duty under Article 25 to manage the trust property with “honesty, good faith, prudence and efficiency”. For example, if a settlor settles shares of a company into trust but retains ownership of them, the trustee would have no right to vote those shares in shareholders’ meetings unless specifically authorized by the settlor to vote on behalf of the settlor.49

3.2.2

An Opinion Contending Trustee as the Owner of Trust Property

Another opinion contends that the ownership of trust property is transferred to the trustee upon the establishment of a trust under the Chinese Trust Law.50 Scholars with this view explain that the use of the word “entrust” in Article 2 of Chinese 49

Graham and Steeny (2012). There are arguments that against this opinion, stating that the ownership of trust property held by the trustee is incompatible with the concept of the ownership in civil system. See Zhang (2007).

50

3.2 Debates Within Chinese Legal Circle Regarding …

49

Trust Law does not necessarily suggest an absence of a transfer of property from the settlor to the trustee. In their opinion, in the relationship between the principal and the agent to an entrustment contract, the entrusted person is obliged to and expected to act in the name of his/her principal. Such acts of the agent are inconsistent with the requirement that the trustee manages or disposes of such property in his/her own name. They argue that the wording “entrust” as used in the Chinese Trust Law may have a meaning different from that of an entrustment contract in its strictest sense. Therefore, they contend that the failure to provide for a transfer of the ownership of trust property from the settlor to the trustee in the definition of trust in Article 2 should not be understood as meaning that the establishment of a trust under the Chinese Trust Law does not entail a transfer of the ownership of trust property from the settlor to the trustee. They emphasize that we should be careful about the fact Article 14 of Chinese Trust Law provides that the trustee obtains the trust property as a result of accepting the trust. This implies that Article 14 suggests that the establishment of a trust involves the acquisition of property on the part of the trustee. The trustee can only obtain property when the ownership to the trust property is transferred to him.51 They contend that, moreover, Article 1652 prohibits the trustee from mixing his own property with the trust property, if the ownership of trust property is not vested in the trustee, such requirements would be otiose.53 Also, Article 10 requires that the trust property should be registered for the purpose of publicizing the property as trust property where the relevant law or regulations so require. It is argued by the scholars contending that Article 10 means that where this provision is applicable, the trust is not effective unless the property is registered under the trustee’s name. Some other scholars admit that it is not clear who owns the trust property according to the provisions of the Trust Law, however, it is necessary to identify the owner of trust property when the trust property is involved into transactions with third parties. According to their opinion, for instance, suppose that a settlor entrusted cash to the trustee for the purpose of investment into a stock company by means of purchasing the stocks issued by the company. Who should be the shareholder of the company after purchasing such stocks? It depends on who owns the trust property from which the said investment was made. These scholars also

51

Qu (2003). See also Lee (2009). Chinese Trust Law, Article 16 provides that:

52

The trust property differs from the property owned by the trustee (hereinafter referred to as inherent property for short) and shall not be deemed as the inherent property of the trustee or become part of the inherent property. If the trustee dies or disbands or terminates as a result of being canceled or being declared bankrupt according to law, the trust property shall not be deemed as his heritage or liquidation property. 53

Qu (2003).

50

3 “Dual Ownership” Versus “Absolute Ownership” …

contend that the transaction costs of transaction for the third party who attempts to make a deal related to the trust property and to protect him/herself against the risk which may arise from the transaction may increase, because the Trust Law does not clarify, and, thereby, both of the settlor and the trustee may cause such risk.54 In this regard, they think that it is better to interpret that the trustee is the owner of trust property in order to reduce to transaction costs, because the ownership is consisting of a bundle of rights and incidents in respect of the property, any tiny branch of such bundle remained at the settlor may cause substantial risk from the viewpoint of the third party who may attempt to deal concerning the trust property. The incidents of ownership generally comprise “the right to possess, the right to use, the right to manage, the right to the income, the right to the capital, the right to security, the incident of transmissibility, the incident of absence of term, the prohibition of harmful use, the liability to execution and the incident of residuarity.”55 Accordingly, the scholars conclude that it is obvious that the Chinese Trust Law entitles the trustee to most of these incidents, thus it would be logical and reasonable to entitle the ownership of trust property to the trustee.56 This point of view was supported practically as well. In a case concerning trust in 2001,57 the court defined in the decision that trust means the act in which the settlor, on the basis of confidence on the trustee, transfers certain property rights it owns to the trustee and the trustee manages or disposes of the property rights in its own name in accordance with the intentions of the settlor and for the benefit of the beneficiary or for specific purposes; and stated that trustee is the subject of ownership to the trust property and is responsible for its own acts. The court also stated that the difference between trust and entrust lies in whether the property is transferred (from the settlor or the principal—added by the author) to the trustee or not. Additionally, for the securitization of credit assets (see Fig. 3.3 for the structure of Asset Backed Securitization transaction), the regulatory authority requires sponsor banks (settler) transfer the assets to the issuer (trustee, always in the form of SPVs) in establishing a trust, in order to make the assets off the balance sheet of the settlor.

54

Wang (2008). Lee (2009). See also Honor (1987), p. 162. 56 Yu (2010). 57 Shandong Food Co. Ltd. v. Jinan Yingda International Trust and Investment Co, Ltd. (2001), see Sect. 2.3.2. 55

3.2 Debates Within Chinese Legal Circle Regarding …

51

Fig. 3.3 Transaction structure of asset backed securitization58

From the perspective of this opinion, the beneficiary’s interest can be classified as a new type of real right beside the ownership, usufructuary right,59 and the security interest.60 It seems that, according to the court, the beneficiary’s interests constitute the complete real rights of the trust property together with the ownership held by the trustee. That is, by the establishment of trust relationship, there happens the alteration of real right on trust property: the owner of the property changes from the settler to the trustee; and a new type of real right—the beneficiary’s interest—is created.61 In light of this understanding, some scholars contend that the trustee has the rights to possess, use, manage and dispose of the trust property in its own name and according to its own decision. Because the Chinese Trust Law requires the trustee to segregate the trust property from the other assets of the trustee, theoretically, the trust property shall not fall within the trustee’s bankruptcy estate, and cannot be 58

(Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China trust industry report 2013, http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 February 2015). 59 Usufruct refers to the right of one individual to use and enjoy the property of another, provided its substance is neither impaired nor altered. For example, a usufructuary right would be the right to use water from a stream in order to generate electrical power. For another example, a farmer may give a right of usufruct of his land to a neighbor, thus enabling that neighbor to sow and reap the harvest of that land. 60 A security interest is a property interest created by agreement or by operation of law over properties to secure the performance of an obligation, usually the payment of a debt. The most common example of a security interest is a mortgage on real property, which involves the transfer of an interest in real property as security for a loan or other obligation. 61 Wang (2008).

52

3 “Dual Ownership” Versus “Absolute Ownership” …

seized by the personal creditor of the trustee. In case of wrongful62 disposition of trust assets by the trustee, the settlor or beneficiary may rescind the wrongful disposition. However, implementation of the segregation of the trust property from the trustee’s other assets may be difficult in practice, because the operational guidelines on separate accounting and trust registration are very rudimentary for the moment in China. To date, no further guidelines have been issued by any governmental agency (including the Ministry of Land and Resource) as to how trust registration can be made (even for real estates, the registration rules are still in the procedure of draft as of today). Therefore, the trust property is very likely to be considered to be a part of the proprietary assets of the trustee by outsiders of a trust. In the case of the bankruptcy or insolvency of the trustee, the trust property may face the risk of falling within the trustee’s bankruptcy estate, or the private creditor of the trustee may assert claims on trust property, because the evidence for the independence of trust property would be very hard to provide by the trustee in the court. This perhaps is the reason why the potential consumers of trust products are hesitate to settle their property under a trust.

3.2.3

An Opinion Contending Beneficiary as the Owner of Trust Property

There are also scholars who hold the opinion that the ownership of trust property belongs to the beneficiary. For those scholars, the beneficiary’s “beneficial right” under a trust can be regarded as an ownership interest.63 They contend that as long as the trust comprises a right of beneficiaries against the trustee to regulate their relationship and to exclude third parties from the enjoyment of trust property, it is sufficient to constitute ownership under a Chinese Trust Law, because the beneficiary’s right carries with it at least some proprietary effects.64 In China, the effects of the beneficiary’s interest contain: “(i) the beneficiary has the right of defense against the trustee’s personal creditors when it comes to the trust property65; (ii) the beneficiary has the right to revoke the act of the trustee conducted in the breach of trustee’s responsibility66; (iii) the beneficiary has the right to claim “Wrongful act” is an act that will damage, physically or emotionally another person. (Black’s Law Dictionary). 63 Wen and Feng (2005). There are two reasons: “(1) Trustee’s possession of the trust property might be terminated by the beneficiary (or the settlor), whereas the owner’s possession of the property has no time limitation and depends on his own will. (2) Trustee’s rights of dispose of trust property are limited within the trust contract documents and the beneficial interest.” 64 Lee (2009). 65 See e.g. Article 17 of Chinese Trust Law. 66 This point is mainly regulated in Article 22 of Chinese Trust Law. If the trustee disposes of the trust property against the purposes of the trust or causes losses to the trust property due to violation of the management duties or improper handling of the trust affairs, the beneficiary has the right to 62

3.2 Debates Within Chinese Legal Circle Regarding …

53

for the benefits.”67 As can be seen from this, the beneficiary’s interest is an exclusive right on the trust property, and the beneficiary can defense against the third party. Besides, the system of trust registration requires the publication of trust property. They contend that beneficiary’s right is real right, because of its exclusive nature, the requirement of publication, and its power of defense against a third party.68 In their conclusion, “equitable ownership” is the real ownership under civil law system, and beneficial interest is the most significant incident of civil law ownership.69 According to this understanding, from the perspective of a third party, the trust property apparently belongs to the beneficiary, although the trustee has the rights to manage and dispose the trust property in its own name. In light of this view, the beneficiary’s interests have strong protection from the Chinese Trust Law against the wrongful dispositions of trust assets by the trustee, because as the owner of trust property, the beneficiary can easily withdraw the wrongful disposition. However, since Chinese Trust Law does not require that the trust property is segregated from the assets of the beneficiary, the trust property is more likely to fall within the beneficiary’s bankruptcy estate, or to be seized by the personal creditor of the beneficiary in the case of insolvency. This consequence runs counter to the purpose of the trust, which aims to provide a mechanism of ring-fenced property free from the bankruptcy of the parties to the trust, or the claim of a third party. Moreover, scholars with this view contend that since typically there are multiple beneficiaries in a trust relationship, especially, in the case of collective trust, there may be hundreds of beneficiaries, vesting the ownership of trust property in multiple beneficiaries might make the situation much more complicated.

3.2.4

Other Minor Opinions

3.2.4.1

An Opinion Contends that Either the Settlor or Trustee Is the Owner of Trust Property

Some of the lawyers in China also argue that, due to the ambiguity of the Trust Law, there can be two kinds of trust in China: one that involves the transfer of the settlor’s rights in the underlying trust assets to the trustee, and another that does not.70 (Footnote 66 continued) apply to the people’s court for withdrawing the disposition; he also has the right to ask the trustee to revert the trust property or make compensation. 67 For example, under certain circumstances, the beneficiary can demand the distribution of the profit of a trust fund, even though the trust contract between the settlor and the trustee does not have such terms. 68 Wang (2008). 69 Wen and Feng (2005). 70 Ho (2012), p. 196.

54

3 “Dual Ownership” Versus “Absolute Ownership” …

Fig. 3.4 Transaction Structure of REITs75

For example, for the securitization of credit assets, it is required by the government authorities to transfer the underlying assets of the sponsor banks (settler) to build a healthy balance sheet, which means that the settler has to transfer the ownership of trust property in order to establish a trust.71 However, a settlor may simply retain his ownership of the trust assets, and enter into a trust contract with the trustee to “entrust” his rights to the latter.72 For instance, for Real Estate Investment Trusts (REITs) (see Fig. 3.4 for the structure of REITs transaction), there are huge obstacles for the transfer of the trust property in the context of Chinese legal system,73 so those scholars argue that it may offer certain feasibility for the parties in REITs if the retention of ownership of trust property is allowed by the Trust Law.74 In their opinion, it is not necessary to transfer the ownership of trust roperty in order to achieve the separate of trust property. The doctrinal basis of

71

Lou (2012). Ho (2012), p. 198. 73 REIT is a collective investment scheme where funds from investors are pooled and invested towards a specified goal as set out in the investment objective of the fund. In addition, a REIT is a fund that is invested in a portfolio of real estate assets or real estate-related assets. 74 Lou (2012). 75 (What is A Real Estate Investment Trust (“REIT”)? http://www.hektarreit.com/faq.php? question=1. Accessed 15 June 2015). 72

3.2 Debates Within Chinese Legal Circle Regarding …

55

the trust without the requirement of the transfer of trust ownership lies in te separate of trust property, which is the sole and core feature of modern trust system.

3.2.4.2

An Opinion Contending that Ownership Is with Either the Settlor or the Beneficiary

In the case decided in 2006,76 the court commented that even if ownership of the trust property has been transferred to the trustee, either the settlor or the beneficiary was the (real or substantive) owner of the trust property. In the view of the court, this is because, first, Article 2 of the Trust Law does not mandate the transfer of ownership; secondly, trustees who manage funds of multiple clients owe the duty to separate the funds “of different settlors”, thus suggesting that the funds are still owned by the settlor; and thirdly, beneficiaries have the right to obtain ownership of the trust fund upon termination of the trust, and this is explicable on the ground that the trust funds are actually owned by the beneficiaries. However, even though transferring the ownership of the trust property is not mandatory under the Chinese Trust Law, in the present case, the ownership of the trust property was indeed transferred to the trustee. Finally, the grant of ownership to beneficiaries upon termination of the trust does not necessarily entail that they own the funds during the existence of the trust.77

3.2.4.3

An Opinion that Contends the Settler, Trustee and Beneficiary Hold Partial Powers on Trust Property Respectively

According to the scholars of this opinion the power on trust property is separate from the right of ownership. They explain that the settlor, the trustee and the beneficiary separately enjoy the different incidents of ownership of trust property, which is clearly stated by Chinese Trust Law.78 They contend that according to the Chinese Trust Law, all the three parties could have a range of powers on the trust property after the establishment of the trust,79 which together comprise the overall ownership powers. The author agrees that the settler, trustee and beneficiary hold partial powers on trust property respectively according to Chinese Trust Law. However, this opinion does not offer any implication that can help the resolution of the problem concerning the location of ownership of trust property.

76 Case Number: Chongqing High People’s Court, First Instance Civil Case No. 14 (2006). Beijing Haidian Science and Technology Development Co., Ltd. v. Shenzhen Xinhua Jinyuan Investment and Development Co., Ltd. 77 Ho (2010). 78 Hu and Chen (2006). 79 See Article 17, 20, 21, 22, 23, 28, 35, 40, 41/2, 50, 51/2, 53 of Chinese Trust Law.

3 “Dual Ownership” Versus “Absolute Ownership” …

56

3.3

Diverse Approaches to Decide the Location of the Ownership of Trust Property in Various Jurisdictions

3.3.1

Trusts in Mixed Jurisdictions: Scotland, Quebec, Louisiana, South Africa

3.3.1.1

Scotland

Scottish law is a mixed legal system, with some areas of law are derived from English law, others are civilian, still others are home-grown. Scots property law has its roots in Roman law, influenced by the absolute ownership principle and the numerus clausus doctrine. However, Scotland not only has the trust but has had it for a long time, at least since the seventeenth century, and has it by common law rather than by legislation.80 Practically there is little difference between what can be achieved with the Scottish trust and the English trust, however, conceptually conventional Scottish lawyers know nothing of the division of legal and equitable ownership. In Scotland, through various theoretical developments, it has become an established opinion that a beneficial interest is not a real right but creditor’s right. Namely, a beneficiary has the rights to demand the trustee to administer the trust according to its terms, and to claim damages against the trustee for any breach of trust, however, the beneficiary has no rights against a third party on the trust property. Scholars think that since the court decision was made in Inland Revenue v. Clark’s Trustees 1939 SC. 11, no particular critique has been raised to challenge the view that the beneficial interest has the nature of personal right.81 The opinion of Lord Normand in this case regarding what rights a beneficiary has by Scots Law to protect his/her interest in the trust property is worth noticing: [T]hese rights of action were a right to interdict the trustee from committing any breach of trust, and a right by personal action to compel them to administer the trust according to its terms. There is also a personal action of damages against the trustee for breach of trust… But there is no action by which a beneficiary as such can in any way vindicate for himself any of the trust property. In my opinion it is no exception from, but rather a confirmation of, this proposition, that a beneficiary may compel trustees to give the use of their names or to grant an assignation of their claim against a third party, or that a beneficiary may sue a third party if he calls the trustees as defenders along with him and alleges a league between the trustees and the third party to enable the third party to evade his obligations to the trust. The result is, in my opinion, that the beneficiary’s right is nothing more than a personal right to sue the trustees and to compel them to administer the trust in accordance with the directions which it contains.82

80

Gretton (2000). Watanabe (2010). 82 Inland Revenue v. Clark’s Trustees 1939 SC. 11. 81

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Also in the decision of this case, the attitude of Lord Normand towards the concepts of common law trusts is stated, which represents, to some extent, the opinions of civilian scholars: I confess that I am not quite clear about the precise construction of the words “legal, equitable, or other estate or interest.”… The word “interest” is linked with the word “estate,” which is a term of art in English trust law, and it may be that the word ‘interest’ must be construed as of it meant some kind of “estate.” That is a term unfamiliar to us in Scotland, and I prefer not to speculate further about the true interpretation of the law of New York States.83

Consequently, under a Scottish trust, the trustee holds the ownership of trust property, and the trust beneficiary/beneficiaries has/have a personal remedy only in any breach of trust.84 The beneficiary can only demand the trustee to compensate for damages incurred by the beneficiary due to any breach of trust by the trustee. In the later stage, the civil law terminology of “patrimony” has been employed to explain this rationale in Scotland.85 Generally, the principle of “patrimony” is: one person, one patrimony. Each person has one and only one patrimony. However, the civilian tradition permits qualifications to this principle. A person could sometimes have a “special patrimony” besides his/her general patrimony. For example, matrimonial property scheme sometimes necessitated a special patrimony, to which real subrogation principle applies.86 Namely, a thing bought with money from that source was part of that special patrimony. By means of this, the assets of the special patrimony are segregated from the general patrimony, and to some extent the civilian tradition has accepted segregation of liabilities as well.87 The two pictures in Fig. 3.5 illustrate the concept of patrimony. The first picture describes the ordinary case of one person and his patrimony, the patrimony being a bag with two parts (the liabilities and the assets). The second picture outlines the case of the person who is also a trustee: one person, but two patrimonies.88 In Scotland, real subrogation is the key to the principle of patrimony, and patrimony is the key to the trust in Scotland. That is to say, a trust in Scotland is a 83

Inland Revenue v. Clark’s Trustees 1939 SC. 11. Waters (2006). 85 The pioneer of this influential theory is Pierre Lepaulle whose understanding of the common law trust was: the trust is a legal institution that consists of a patrimony independent of any legal person, whose unity is defined by an appropriation, which is unconstrained except for the limits imposed by law and by public policy. See Lepaulle (1927). See also Smith (2009): “This theory has been very influential. In Mexico, it directly influenced the drafting of the trust institution that was created by statute in 1932, replacing an earlier kind of trust that was premised on irrevocable mandate. Its influence is also seen in the Civil Code of Québec. Most recently, it can be seen in the trust that has just been created in French law.” 86 See Smith (2013), p. 476: “Generally, subrogation is the substitution of one person in the place of another with reference to a lawful claim, demand, or right, so that he or she who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or Securities.” 87 Waters (2006). 88 Gretton (2000). 84

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Fig. 3.5 Illustrations of Patrimony (Gretton 2000)

special patrimony.89 The trustee has his personal patrimony, and a segregated fiduciary patrimony as well. Scholars of this opinion contend that a trustee of the fiduciary patrimony can have the rights of disposition and management of the property, but another person has the right of enjoyment of the same property.90 The rights of beneficiaries in Scots law are personal rights against the trustee, enforceable against the special patrimony. In contrast, personal rights enforceable against the trustee in his personal patrimony are generally not enforceable against the special patrimony. Hence, there is no need to resort to the concept of dual ownership. Instead of dual ownership, there is dual patrimony.91 Scot law is characterized by its way to decide the location of the ownership of trust property. It employs its traditional concept of patrimony to successfully explain the rights and duties of the trustee and the beneficiary. This implies that the common law concept of “dual ownership” of trust property is not necessarily essential in implementing trust in civil law jurisdictions. However, since the concept of patrimony is unfamiliar in China, the said approach by Scot law is not practical to be utilized by Chinese trust.

89

Gretton (2000). Waters (2006). 91 Gretton (2000). 90

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3.3.1.2

59

Quebec

Quebec Law was influenced by French law in the seventeenth century when it was a French colony, while its private law was influenced by English law in the eighteenth century when it was under British sovereignty. In the following century since the eighteenth century, English-speaking businesses and trading companies became an established feature of Montreal, the largest city of the Quebec, and the usage of the common law trust became popular with this feature.92 It was the legislature rather than the courts and practitioners that initiated the development of trust in Quebec. In 1879, there passed an act which regulated the use of the trust in gifts and wills. However, this Act did not suddenly adopt the trust in Quebec law. Rather, it has been considered as a further step in the history of a civilian institution, namely the French fiducie, which had already existed for centuries. Based on the concept of fiducie, the courts in Quebec previously held that the Quebec trust entailed a transfer of ownership in the trust property from the settlor to the trustee. Accordingly, the beneficiary only had a personal right against the trustee.93 Some scholars contend that the this was a conceptual “graft” of the legal title of trustee in common law, but it provided no mechanism to ensure the trustee’s competent, honest and faithful administration of trust property, and entirely in the interest of the beneficiaries. Indeed, by contrast to the circumstance regarding legal title in the common law, the civil law does not have measures for enforcement similar to the remedies which a trust beneficiary enjoys in equity. Quebec law has never accepted the split between a legal ownership and a beneficial ownership. Since the trustee held the ownership of the trust property, the beneficiary could only claim creditor’s rights against the trustee based on abuse of right or fraud, or a breach of faith.94 However, scholars in Quebec argue that analysis that the fiducie results in a transfer of ownership of property from the settlor into the patrimony of the trustee, does not comply even with the text of the 1879 Act. Several provisions of the 1879 Act implied that it was in the quality of a manager that the trustee obtained control of the property which comes under the fiducie.95 Moreover, the said interpretation of the court, outlined above, was also rejected in the 1865 Civil Code of the province. Conceptually, it was considered impossible to describe the trustee as “owning” the trust property, because it seems that the Civil Code just says that the trustee was “seized” of the trust property. Fiduciary ownership was rejected as a solution to the problem as to the location of ownership of trust property in Quebec, as a trustee with title to property which he/she holds only in a fiduciary capacity is not an absolute owner.

92

Waters (2006). See Royal Trust Co v. Tucker 1982 1SCR 250. 94 Honoré (2003). 95 Cumyn (2012), p. 6. 93

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The final solution for Quebec was found in an adoption of Pierre Lepaulle’s theory of an “unowned” fund.96 As observed by scholars, “according to Lepaulle’s theory, the trust fund is not owned by anyone (whether the settlor of the fiducie, the trustee, or the beneficiary); it is a fund dedicated to an end or purpose, in which the trustee has a personal right (whereby he can administer it) and the beneficiary has also a personal right (whereby he compels the carrying out by the trustee of the beneficiary’s distribution entitlement).”97 In other words, as Prof. Honoré put it, “the property of a trust is always a patrimony by appropriation. It is autonomous and distinct from the patrimony of the settlor, trustee or beneficiary, none of whom has any real right in it. Though it may be identified by the name of the settlor, the trustee, the beneficiary or the purpose it serves, it is not owned by anyone.”98 However, this thought is taken even further in Quebec. Whereas Lepaulle insisted that the trust property has no owner, the estate in the Quebec trust has an owner—the trust itself. Although the Civil Code of Quebec does not formally define the trust as a juristic person, in effect the trust is such an entity in Quebec.99 The nature of the trust is now described as follows: The trust patrimony, consisting of the property transferred in trust, constitutes a patrimony by appropriation, autonomous and distinct from that of the settlor, trustee or beneficiary and in which none of them has any real right.100

While the provisions on fiducie in the Civil Code were placed in the book on property, the Quebec fiducie does not particularly link to real rights, nor does it relate to the law of obligations. Scholars contend that it would be more appropriate to associate it with legal persons. In other words, as a patrimony by appropriation, the fiducie becomes an autonomous entity, namely the owner of the property dedicated to the specific purpose intended by the settlor. Its patrimony is regarded by the Civil Code as independent of the personal patrimonies of the parties involved with the trust.101 Quebec trust goes further than Scot trust in employing the concept of patrimony. It emphasizes the independence of the trust property itself, rather than owned by anybody. This approach may give China an implication that the importance of the independence of the trust property to make trust a practical vehicle. Though Chinese Trust Law requires the segregation of trust property from the settlor’s and the trustee’s general property, the way of such segregation is not practical.

96

Waal (2001). Waters (2006). 98 Honoré (2003). 99 Waal (2001). 100 See Article 1261 Civil Code of Quebec1991. 101 Cumyn (2012). 97

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61

Louisiana

It is considered that Louisiana is a mixed jurisdiction, with the private law drawn from the civilian tradition while the public law drawn from the common law tradition.102 The territory of Louisiana was under French control in 1731 and was for a period Spanish colony thereafter, and again in the possession of France when acquired by the U.S. in 1803. Therefore, Louisiana laws were of the Latin civilian tradition, and were greatly influenced by the French Code Napoléon of 1804.103 Louisiana legislature recognized Trusts desultory prior to 1964, however, in that year the present Trust Code of Louisiana was adopted.104 The restatement of the law (Second), Trusts of U.S. is the principal structure source of Louisiana Trust Code. Scholars comment that: “the pivot of the codified civil law in Louisiana is the formal conception of ownership.” They contend that the common law and civil law schemes of property interests are incommensurable both formally and functionally.105 The fundamental architecture of Louisiana’s law of trusts has been selectively adopted from the common law tradition. In other words, only limited features of the trust have been incorporated into the state’s private law. Only limited notions of “title” and “ownership” have been received.106 Though the “title” of trust property was conferred upon the trustee by the Trust Code,107 it has been widely interpreted by some civilian opinions in the U.S. as inconsistent with the civil law absolute ownership principle. The critics argue that in fact the Trust Code permits the interpretation that the beneficiary “owns” the trust property, just subject to the real rights of the trustee to dispose and administer of the trust property.108 However, is the trustee the owner of the property? If so, is that ownership absolute and

102

McAuley (2012). Waters (2006). 104 Waters (2006). 105 McAuley (2012). 106 McAuley (2012). 107 Article 1781 of the Trust Code provides that: 103

A trustee is a person to whom title to the trust to the trust property is transferred to be administered by him as a fiduciary. Waters (2006). See also Yiannopoulos (1999): “At first blush, article 1781 of the Code would seem to imply that the trustee becomes owner of the trust property. However, this is not how the article has been interpreted, in a series of cases ‘title’ has been held to denote ‘a power of administration and disposition rather than ownership’. Ownership of the trust assets vests in the trust beneficiary. Accordingly, the problem of a fragmentation of ownership has been avoided.” See also McAuley (2012), pp. 129–130: “[T]here is neither need nor room for a fragmentation of ownership into components of legal title and equitable interest. The trustee has a real right that permits him to manage and dispose of the trust property. The beneficiary has likewise a real right, which is ownership subject to trust, that is, ownership without power of administration and disposition.” 108

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indivisible as required by civilian tradition?109 There are scholars arguing that Article 1781 does imply a divided title. For example, some scholar unambiguously contends: [T]he Trust Code accepts the common law dichotomy of ownership: title to the property is in the trustee, but the benefits of ownership are owed to the beneficiary.110

Similarly, in a case decided by the United States Fifth Circuit Court of Appeals in 1949, United States v. Burglass, which was decided under the Louisiana Trust Estates Act of 1938, the court found the beneficiary’s interest in trust income to be community property and recognized the trustee as legal title holder of trust property. The precedence of the case United States v. Burglass is Dunham v. Dunham. In Dunham v. Dunham, one of the spouses, Mrs. Reynolds, was a beneficiary of a trust established by Mr. Reynolds. The income had accrued during the marriage of the parties. Under the terms of the Dunham trust, none of the trust income was actually distributed to the beneficiary spouse during the term of the trust. The Dunham court stated: [T]he intent of our trust laws as expressed in the language employed therein by the legislature is to clearly and unmistakably vest both title and ownership of the trust corpus in the trustee.

However, the court of United States v. Burglass used the opportunity to repudiate the conclusion that ownership of the corpus rested in the beneficiary and title vested in the trustee. Approving of Dunham, the court of United States v. Burglass equated the trustee’s title with ownership. However, on rehearing, a plurality of the Supreme Court held that the distributed income was community property and that the undistributed income remained the separate property of the beneficiary spouse. The court, citing Louisiana Civil Code Article 477 and former Article 489, stated that the beneficiary’s interest was clearly less than full ownership and that title to the property vested in the trustee. The court characterized the beneficial interest as an incorporeal right and the distributed revenues from that incorporeal right were deemed as civil fruits.111 Louisiana trust selectively accepts the notion of “title” or “ownership”, which leaves room for interpretation. It needs the accumulation of cases and practice in Louisiana to make clear the rights and duties of each party to the trust relationship. To some extent, Louisiana trust has some similarity to Chinese trust, which also needs the accumulation of practice to decide the location of ownership of trust property.

109

Lorio (1982). Martin (1990). 111 Civil fruits are revenues derived from a thing by operation of law or by reason of a juridical act, such as rentals, interest, and certain corporate distributions. See also supra note 200. 110

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3.3.1.4

63

South Africa

The law of South Africa was a mixture of Afrikaans law and the laws (mainly regarding family and succession) of the indigenous people in the beginning of the nineteenth century when the English settlers arrived. Afrikaans law was the old uncodified Roman-Dutch law, a mix of customary law and Roman law. To date, South Africa law has a strong tradition of Roman law. The English settlers brought the common law trust in South Africa after England acquired the Cape Colony in 1806. Only in early twentieth century, the courts in South Africa were called upon to explain the characteristic of its legal system, namely whether its law could give legal effect to a South African trust and, if so, on what basis.112 At an early stage, in the well-known case Estate Kemp v. McDonald’s Trustee 1915 AD 491, the court in South Africa held that the fideicommissum113 was the appropriate “legal niche” for the testamentary trust in South African law.114 The court decision of this case made clear the basic structure of the trust in South African law. Namely, the trustee is the owner of the trust property and the trust beneficiary has only a personal right against the trustee. Thus the conundrum of a divided title of the trust property was avoided.115 However, in the case Braun v. Blann and Botha 1984 2 SA 850 (A) 866B, the Supreme Court of Appeal in South Africa refused the opinion of equating the trust with the fideicommissum, trying to adapt the “trust idea” to the principles of its own law. During the evolution, the trust form with ownership vested in the trustee, is the more widely utilized in South Africa. However, South African law is characterized by statute of a bewind trust (drawing form Dutch bewinds). The Trust Property Control Act (Act 57 of 1988) was enacted in 1988, which defines a trust as to cover both forms of trust above.116 In a bewind trust, the settlor of the trust assigns

112

Waal (2001). See Vicari (2012): “The fideicommissum was one of the most popular legal institutions in Roman Law for several centuries. It translates from the Latin word fides (trust) and committere (to commit), meaning that something is committed to one’s trust. In fideicommissum, the fiduciary had to hand over to the beneficiary everything he had received.” 114 See Hahlo (1961). See also Waal (2001). 115 Waal (2001). 116 Trust Property Control (Act 57 of 1988), s.1. provides that: 113

[T]he arrangement through which the ownership of property of one person is by virtue of a trust instrument made over or bequeathed (a) to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit or the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument, or (b) to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument.

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ownership of the trust property to the beneficiaries, and the rights to dispose of and manage the trust property are irrevocably transferred by the settlor to the trustee for the duration of the trust.117 However, there were scholars in South Africa who insist that the two trust forms derived from English and Dutch law represent different institutions. Yet others argue against this view that, the two patterns are functionally the same institution, because the same rules applied to both and they worked in the same way. They contend that “it did not matter whether the arrangement was called a trust or a bewind, or whether the person controlling the property was called a trustee or an administrator.”118 Moreover, the concept of “trusteeship as an office” in South African law is particularly well-established, mainly through the work of Honoré119 and a number of notable provisions in the Trust Property Control Act.120 Essentially, this concept means that the trust possesses a public element, in other words, the State in general and the court in particular play an important role in the proper administration and execution of trusts. South African law assumes two types of trust: one with the ownership of trust property vested in the trustee from the settlor, the other with the ownership of trust property transferred from the settlor to the beneficiary. This unique feature of South African law may suggest that, depending on the situations, it is possible to locate the ownership of trust property on different parties. Compared to this, it might be not strange for Chinese trust to permit two types of trust (one that involves the transfer of the settlor’s ownership in the underlying trust property to the trustee, and another that does not),121 as well.

3.3.2

Trusts in East Asia

3.3.2.1

Japan

Japan pioneered the legislation of the trust in East Asian. The tactics it utilized to adapt the common law trust concept to a civil law framework had subsequently studied by other trust laws jurisdictions in Asia. In their recent revision of trust laws, Taiwan and South Korea also followed the amendment of the Japanese Trust Law in 2006.122

117

See Waters (2006). Honoré (2003). 119 See Cameron and Waal (2002). 120 Act 57 of 1988, especially §§ 4(l), 6, 7, 13, 16 and 20. 121 See Sect. 2.3.1. 122 Arai (2013), p. 28. 118

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The Trust Law of Japan was first enacted in 1922. It is considered that it has adopted a definition of trust modeled upon the California Civil Code and India Trust Law.123 Article 1 of the Japanese Trust Law (1922) provides a definition of trust: “The trust within the meaning of this Law shall signify to transfer or otherwise dispose of a property right and cause another person to administer or dispose of the property in accordance with some specific purpose.” Japanese Trust Law (1922) clearly defines the ownership of trust property solely vested in the trustee by providing that trust is established by the assignment of ownership of trust property from the settlor to the trustee, as provided in Article 1 of Japanese Trust Law (1922). Meanwhile, Japanese Trust Law (1922) generally entitles the beneficiary to strong creditor’s rights against trustee. For example, Article 7 of Japanese Trust Law (1922) provides that “A person designated by the provisions of terms of trust as one who is to be a beneficiary shall acquire a beneficial interest by operation of law; provided, however, that if the terms of trust otherwise provides, such provisions shall prevail.” According to Article 27 of Trust Law (1922), when any loss to the trust property has occurred due to the trustee’s breach of the duties, the beneficiary may claim the compensation for a loss or restoration of the trust property against the trustee. Additionally, Article 31 of Trust Law (1922) provides that when a trustee has disposed of the trust property with a third party, a beneficiary may rescind the disposition only if the property is registered under a trust, or where the property is not duly registered, the third party knew or was grossly negligent in failing to know that the disposition was carried out in violation of the trust. Presumably, because the rights warranted to the beneficiary under the Japanese Trust Law is very substantial and strong compared to ordinary creditor’s right (and, also, according to some scholars, the Japanese Trust Law has certain degree of ambiguity in this matter124), the Japanese scholars had debated whether the rights of the beneficiary is deemed as a kind of ownership or still being a creditor’s right.125 After 84 years since the legislation of trust in Japan, the Trust Law was first amended. During this period of more than 80 years, the trust system in Japan

123

Arai (2013), p. 27. Arai (2013), p. 28. Article 1 of Japanese Trust Act 1922 provides a definition of trust stating: “The trust within the meaning of this Act shall signify to transfer or otherwise dispose of a property right and cause another person to administer or dispose of the property in accordance with some specific purpose.” 125 One group of scholars turns to Civil Code concepts for their interpretation. They view the creation of a trust and its effects as legal relations based on the fundamental distinction between a right in rem and a right in personam, and, in practical terms, describe the process as a sort of contractual relation or a relationship of rights and obligations. The other group contends that a UK-style approach should instead be adopted, emphasizing the legal effects of the trust itself without bothering too much about its contractual structure based on the distinction between a right in rem and a right in personam. The property must be transferred or disposed by the settlor to the trustee for the purpose of creating a trust. The transfer involves a change in the nature of the holder’s title so that title is held as trustee. As a result of the act of transfer or disposition, the trustee becomes the owner (title holder) of the trust property. 124

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developed mainly around commercial trust activities of trust banks, such as loan and pension trusts, particularly after the end of the Second World War. In recent years, there is increasing demand for investment and finance schemes in the commercial trusts, while the increasingly aged society has resulted in a rise in expectations about family trusts for the purpose of asset management and inheritance transfers. Compared with the previous Trust Law (1922), the Japanese Trust Law (2006) introduced some flexibility in the way to establish a trust. Article 2(1) of the Japanese Trust Law (2006)126 defines a trust as an arrangement in which a person “administers or disposes of property in accordance with a certain purpose (excluding the purpose of exclusively promoting the person’s own interests) and conducts any other acts that are necessary to achieve such purpose”. A trust is established by any of the following methods stipulated in Article 3: (1) entering into a ‘trust agreement’ with the trustee; (2) making a will; or (3) manifesting an intention to set up a trust as evidenced by notarial deed, other document or electromagnetic record, for a person to assume the duties of a trustee. Further, Article 4 (1) of Japanese Trust Law (2006) provides that a trust created by trust agreement shall become effective when a trust agreement is concluded between the person who is to be the settlor and another person who is to be the trustee. Based on these provisions, cited above, the establishment of a trust (and the coming into effect of a trust) in Japan is independent from the assignment of the trust property from the settlor to the trustee. A trust is established and comes into effect even prior to the assignment of trust property. Moreover, although a constructed trust is not recognized under the Japanese Trust Law, the Supreme Court of Japan is able to find the establishment of a trust even though the settlor and trustee did not use the word “信託” when they contract with each other.127 These provisions do no more require the settlor to transfer trust property to the trustee on or prior to establishing a trust.128 Because there is a practical demand in Japan to establish a trust even before assignment of trust property when they establish an investment scheme prior to place interest to the investor. However, the principles and attitudes of the 1922 Trust Law are firmly maintained by the 2006 Trust Law in Japan, because it is clearly confirmed that the ownership of trust property is at the hand of trustee in the 2006 Trust Law. Specifically, Article 2(3) of Japanese Trust Law (2006) defines trust property as “any or all property which belongs to the trustee and which should be administered or disposed though a trust.” In addition, Article 3(1) of Japanese Trust Law (2006) provides that “A trust shall be created by any of the following methods: (1) by concluding an agreement with a specific person to the effect that the person will be 126

The English translation of Japanese Trust Law (2006) is available at http://www. japaneselawtranslation.go.jp/law/detail/?id=1936&vm=04&re=02. Accessed 15 August 2015. 127 See scholar’s interpretation of the related case, available at http://www.fsa.go.jp/frtc/seika/ discussion/2003/20030909.pdf. Accessed 4 August 2015. 128 See also Sese (2009): “[A]s Japanese new Trust Law recognizes the declaration of trust, the relevant provisions do not require the transfer of property, however, creation of trust except for a declaration of trust requires the transfer of property.”

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assigned property (emphasis added by the author), that the person will be granted a security interest in property, or that property will otherwise be disposed of to the person, and that said specific person should administer or dispose of such property in accordance with a certain purpose and carry out any other acts that are necessary for achieving such purpose.” Registration of trust in Japan is not a qualification of the establishment of a trust, rather it is a matter about whether the party to trust can claim against a bona fides third party. According to Article 14 of Japanese Trust Law (2006), “with regard to any property for which the acquisition, loss, and modification of any right may not be duly asserted against a third party unless it is registered, the fact that such property belongs to the trust property may not be duly asserted against a third party unless the fact that the property is under the trust is registered.” Accordingly, for property provided in this Article, if it is not registered under the trust, any party to the trust cannot assert its rights on the property against a third party. For example, suppose that Anna and Bob made a trust contract, agreeing on that Anna assigns her apartments to Bob, and Bob manages these apartments for the benefit of Anna’s daughter Cindy. Anna’s apartments are registered in the name of Bob, however, they are not registered under the trust. If Bob’s creditors claim that these apartments fall within Bob’s insolvent property, the court in Japan may support such claim, although a trust contract between Anna and Bob can be found by the court. Although the ownership to the trust property is vested only to trustee, Japanese Trust Law (originally 1922 and amended 2006) seeks a middle way by making trustee’s ownership right subject to fiduciary duties specifically provided by the Trust Law in order to give pretty strong protection to the beneficiary’s interest.129 Moreover, although the beneficiary’s rights are designed by the Japanese Trust Law (originally 1922 and amended 2006) as creditor’s rights, the beneficiary is entitled very strong rights against the trustee, almost close to their rights of ownership to some extent. In this respect, compared to the general and abstract provisions in 1922 Trust Law (as cited above), the 2006 Trust Law in Japan provides more detailed provisions.130

129

See Article 29-47 of Japanese Trust Law. See e.g. Article 92 of Japanese Trust Law: “No restrictions may be imposed by the provisions of the terms of trust on the beneficiary’s exercise of the following rights:

130

(i) the right to file a petition with the court under the provisions of this Act; (ii) the right to call for a definite answer under the provisions of Article 5, paragraph (1); (iii) the right to assert an objection under the provisions of Article 23, paragraph (5) or paragraph (6); (iv) the right to demand payment under the provisions of Article 24, paragraph (1); (v) the right to rescind under the provisions of Article 27, paragraph (1) or paragraph (2) (including cases where these provisions are applied mutatis mutandis pursuant to Article 75, paragraph (4)); (vi) the right to rescind under the provisions of Article 31, paragraph (6) or paragraph (7); (vii) the right to request a report under the provisions of Article 36;

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Since China has been influenced by Japan in many respects such as legal system and economic growth, the said approach above adopted by Japan may set an example for Chinese trust. Importantly, the social reality of Japan and China is submitted by the author to be different, which might affect the choice of the legislator regarding the location of ownership of trust property.

3.3.2.2

South Korea

South Korea enacted a Trust Law in 1961 when it was in the early stages of its striking economic expansion. The Korean Trust Law (1961) closely follows the 1922 Japanese Trust Law. Article 1 of Korean Trust Law (1961) defines the trust as “a legal relation” between the settlor and the trustee, involving the “transfer” or

(Footnote 130 continued) (viii) the right to request to inspect or copy materials under the provisions of Article 38, paragraph (1) or paragraph (6); (ix) the right to demand compensation for a loss or restoration of the trust property under the provisions of Article 40; (x) the right to demand compensation for a loss or restoration of the trust property under the provisions of Article 41; (xi) the right to demand a cessation under the provisions of Article 44; (xii) the right to demand payment under the provisions of Article 45, paragraph (1); (xiii) the right to demand a cessation under the provisions of Article 59, paragraph (5); (xiv) the right to demand a cessation under the provisions of Article 60, paragraph (3) or paragraph (5); (xv) the right to demand payment under the provisions of Article 61, paragraph (1); (xvi) the right to call for a definite answer under the provisions of Article 62, paragraph (2); (xvii) the right to waive a beneficial interest under the provisions of Article 99, paragraph (1); (xviii) the beneficiary’s right to demand that the trustee acquire the beneficial interest under the provisions of Article 103, paragraph (1) or paragraph (2); (xix) the right to call for a definite answer under the provisions of Article 131, paragraph (2); (xx) the right to call for a definite answer under the provisions of Article 138, paragraph (2); (xxi) the right to request the delivery of documents or provision of records under the provisions of Article 187, paragraph (1); (xxii) the right to request to inspect or copy materials under the provision of Article 190, paragraph (2); (xxiii) the right to request that a matter be stated or recorded in the registry under the provisions of Article 198, paragraph (1) (xxiv) the right to demand compensation or payment of monies under the provisions of Article 226, paragraph (1); (xxv) the right to demand compensation or payment of monies under the provisions of Article 228, paragraph (1); and (xxvi) the right to demand compensation for a loss under the provisions of Article 254, paragraph (1).”

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“disposition” of “a specified property” to the trustee, as provided in Article 1 of the 1922 Japanese Trust Law. The Korean Trust Law clearly suggests that the ownership of trust property passes from the settlor to the trustee.131 Following the amendment of Japanese Trust Law in 2006, Korea Trust Law was revised as well in 2011. Article 2 of the Korean Trust Law (2011) defines the trust as “a legal relation whereby a person who creates a trust transfers a specified right to a person who accepts the trust on the basis of the confidence reposed in the trustee by the settlor, and the trustee has to manage, dispose of, administer, develop those rights, or take steps necessary for the fulfillment of the interests of a specified person or a certain purposes.” The concept of dual ownership is not accepted in Korean trusts law, as it is incompatible with the indigenous concept of absolute ownership which requires that no identical ownership can vest in more than one person. In light of the indigenous concept of ownership, since the trustee is the recognized owner of the trust property, it is not possible for the beneficiary to also have a right of ownership over it. Moreover, when a personal right (e.g., a contractual claim) is included in the trust fund, civil law simply does not embrace such a concept as “ownership of contractual/personal right” in its contract or property law. If a person is a creditor, it would only be appropriate in civil law to conceptualize him as having a personal claim against the debtor, not that he has ownership of his right as creditor against the debtor. Commentaries in South Korea have thus far only treated the beneficiary’s rights as a personal one. However, it is submitted by Korean scholars that it is possible to conceptualize the beneficiary’s right as a new type of proprietary interest that is attached to the rights (either proprietary or personal) held by the trustee. This, of course, needs to overcome the strong attachment civil law has to the principle of numerous clausus. This principle requires that all rights having a proprietary nature must be clearly provided for by law. This opinion can, to some extent, overhaul the conventional understanding of the beneficiary’s right as a personal right.132

3.3.2.3

Taiwan

The original legal system in Taiwan was greatly influenced by the German legal system. As a civil law jurisdiction, the Civil Code of Taiwan has adopted the concept of ‘numerus classus’, and upheld the independence and publicity requirement of property acts as essential conditions for effecting changes in property rights. The core of a trust has been summarized in academic commentary as follows. Once a trust relationship is created, the trust property becomes independent from the property of the settlor, the trustee and the beneficiary, and is not available to

131

See Waters (2006). Wu (2013), p. 57.

132

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personal creditors of all these three parties. The trust property is thereby identified and transformed into an independent entity.133 However, courts in Taiwan did not recognize these concepts before the Taiwanese Trust Law was enacted. They took the view that the trustee had full, undivided ownership over the trust property subject to the rights enjoyed by the settlor under the trust agreement. Accordingly, when the trustee becomes insolvent, the trust property falls within his bankruptcy estate. The right of the settlor or the beneficiary against the trustee is but a matter of the internal relationship between them and the trustee, and hence not exigible against the latter’s personal creditors. For the same reason, his personal creditors may apply to the court to enforce their claims against the trust property. While this interpretation is capable of meeting the requirements of numerus classus and “unity in ownership doctrine” as well as ensuring security of transactions with third parties, it is different from the core concepts of a trust in common law. In order to incorporate the concept of “dual ownership” into the Taiwanese legal system, the legislature in Taiwan followed the trust statutes in Japan and Korea, and provided in article 9 of the Taiwanese Trust Law that the trust property appertains to the trustee.134 The trustee not only possesses the trust property nominally, but is also treated as the legal owner of the trust property, although it is the beneficiary who is entitled to and enjoys the substantive interest. In order to balance the protection of the interest of the beneficiaries with the security of transactions, the legislature has laid down the principle of the independence of trust property, notwithstanding that the concept of “dual ownership” was not expressly endorsed. As a result, the Taiwanese Trust Law has also stipulated the following mandatory requirements to achieve the independence of trust property by excluding it from: succession by the trustee’s heirs, the trustee’s bankruptcy, compulsory execution by the trustee’s personal creditors, set-off by the trustee’s personal creditors, and from commingling with other assets of the trustee.135 Based on article 4 of the Taiwanese Trust Law, registration of the trust is a way to achieve public notice, which in turn ensures security of transactions and avoids unfair prejudice to third parties acting in good faith. The beneficiaries’ rights over trust property are enforceable against third parties if the existence of the trust is capable of being put on notice in accordance with law. Pursuant to article 1 of the Taiwanese Trust Law, the essential elements for creating a trust include both the settlor’s transfer of title over trust property to the trustee and the grant to him of the right to administer or dispose of the property. In other words, a passive trust in

133

Wang et al. (2013). Taiwanese Trust Law, Article 9:

134

[T]he property rights acquired by a trustee by virtue of a trust act shall be deemed to be a trust property. Any property rights acquired by a trustee from the administration, disposal, destruction, damage or otherwise of trust property shall appertain to the trust property. 135

Wang et al. (2013), p. 72.

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which the trustee does not have rights to administer or dispose of the trust property is not a trust recognized by the Taiwanese Trust Law. As outlined above, Korean and Taiwanese trust follows Japanese trust, vesting the ownership of trust property only to the trustee. However, regarding the location of ownership of trust property, Chinese trust does not (or fails to) follow Japanese trust law. This fact may suggest that, unlike its neighbors, there would be something in China that obliged Chinese lawmakers to employ another way—vagueness about the location of the ownership of trust property, which requires deep research on practical factors.

3.4

Interim Conclusion and Limits of Existing Research

As shown above in this chapter, many of civil law jurisdictions and so-called mixed jurisdictions paid much effort to give explanations to “trust” because of the potential conflict between the understanding of property rights in those jurisdictions and the trust. The central element of the English trust is deemed to be that the trustee obtains legal ownership/title of trust property in the establishment of a trust, while beneficial ownership/title of trust property is transferred to the beneficiary. In other words, it is considered that the trust permits a division in the ownership of trust property between a trustee and a beneficiary.136 However, from the perspective of the lawyers and legal scholars who have very conventional concept of the ownership of property rights in civil law jurisdictions, the concept of trust runs counter of important tenets of civil law principles, particularly, the theory of “absolute ownership” and numerous clausus principle. For example, as shown typically in Japanese trust, the ownership to the trust property is vested only to trustee, while the law specifically gives the beneficiary very strong rights against the trustee, and such beneficiary’s rights are, still designed as creditor’s rights, almost close to ther rights of ownership to a certain degree. In the very traditional understanding of property rights in Roman Law, the ownership of property is absolute in two ways. First, the title was absolute in the sense that the owner’s title was not merely better than all others, but the only title to a thing. Secondly, the owner had the absolute and unrestricted power of dealing with the thing, except for certain minor restrictions imposed by public law.137 Although this concept of “absolute ownership” sometimes causes difficulties in integrating with other legal theories, it has passed into the modern law, with adjustments on this concept.138 From the point of view of lawyers and legal scholars who insist this “absolute ownership” principle, the split of ownership of

136

For details, see Sect. 3.1 of this book. See Lawson (1955), p. 108. 138 For example, the ownership of property can be restricted by other types of rights in rem such as easements rights, rights to mortgage, and usufructuary rights etc. 137

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trust property between the trustee and the beneficiary is not understandable. Therefore, debates focus on the explanation of vesting the absolute ownership of trust property in one of the parties (settlor, trustee, or beneficiary) or even upon a separate entity. The conflict between the conventional understanding of property rights and the concept of trust may cause difficulties when introducing the trust law into legal system of the civil law or the “mixed” jurisdictions. In order to reduce any negative impact the concept of trust may have on indigenous civil law regimes, and also for the lawyers in civil law counties to understand the trust, it has been tried by legislators in various jurisdictions to solve the problem regarding the location of ownership of trust property through several approaches139: (1) the settler transfers (absolute) ownership of trust assets to the trustee, but the trustee’s ownership is subject to certain restrictions set by the trust law and/or the terms of trust set by the settler)140; (2) the settler transfers ownership of trust assets to the beneficiary, but the beneficiary’s ownership is subject to the trustee’s powers of management of trust assets141; or (3) the settler transfers ownership of trust assets to a separate patrimony142 not owned by any person, but the patrimony’s ownership is subject to the trustee’s management powers of trust assets and the beneficiary’s correspondent rights of beneficiary enjoyment.143 The approaches outlined above are also supported by the recent consensus among legal scholars that the concept of “dual ownership” of trust property in the English trust is not an essential element of the trust. Increasing literatures agree that the rights of a beneficiary under a trust were initially not considered as property rights. However, these rights evolved and came to be accepted as proprietary and finally, in some circumstances, as ownership rights. The “equitable ownership” in common law jurisdiction is functionally remedial right for the beneficiary of the trust.144 Therefore, when the trust is introduced into civilian and “mixed” jurisdictions, if other legal mechanisms could be developed to provide protection to the trust beneficiary instead of an “equitable ownership,” the ownership of trust assets can be solely vested in the trustee. But the reason why different approaches were adopted in different jurisdictions is worth doing further research. This is beyond the scope of this book.

139

The approaches outlined in the following text are summarized by Professor Lusina Ho in Ho (2012). See also Meng (2015), p. 494. 140 The jurisdictions employ this approach in their legislation are, for example, Scotland, Japan, Korea, Taiwan etc. For details, see Sects. 3.3.1 and 3.3.2 in this chapter. 141 South Africa is among one of the jurisdictions adopting this approach. See Sect. 3.3.1 in this chapter. 142 In civil law systems, patrimony refers to the total of all personal and real entitlements, including movable and immovable property, belonging to a real person or a juristic person. It is, in some respects, similar to the common-law concept of a person’s estate. See Sect. 3.3.1 of this chapter. 143 Quebec Civil Code is the most notable example of this approach. See Sect. 3.3.1 of this chapter. 144 For details, see Sect. 3.1.1 of this chapter.

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Similarly, China is also facing the problem regarding the location of ownership of trust assets, which is left open by the Chinese trust law.145 The Chinese trust law neither mandates the settler of a trust to transfer the trust assets to the trustee, nor prohibits the transfer of trust property in creating a trust. This allows several possibilities in respect of the location of the ownership of trust property. In the existing studies on trust property rights in China, almost every possibility has been interpreted by lawyers and legal scholars. Generally, the followings are prevalent: (1) ownership of trust assets is transferred to the trustee by the settlor when establishing a trust; (2) ownership of trust assets remains with the settlor even after the establishment of a trust. It is noted that the settlor’s retention of trust property ownership is quite different from the approaches adopted by other civil law jurisdictions; (3) ownership of trust assets is with the beneficiaries upon the creation of a trust; (4) titular ownership146 of trust property is with the trustee, substantive ownership of trust property is with the settlor and beneficiaries upon the establishment of a trust; (5) ownership of trust assets is with either the settlor or the trustee depending on whether the settlor had transferred ownership of trust property to the trustee. As summarized above, lawyers and legal scholars in civil law jurisdictions made much effort on the issue regarding the location of trust property ownership, aiming to giving explanations that fit with the underlying civil law principles. What is important is segregating the trust property from the settlor’s general recourse and also from the trustee’s general recourse, while guaranteeing the beneficiary very strong rights to the trust property which is very close to ownership rights. However, one important point that is rarely taken into consideration by trust law scholars is the trust business itself and the ever-changing social context surrounding it. Laws are the reflection of the dynamic society in a certain context, legal solutions for the same problem in different social contexts might be different as well. Specifically, the mutual trust between citizens, or between the financial institutions and consumers in one jurisdiction is generally different from another jurisdiction. Moreover, the institutional trust of citizens/consumers in the legal system and/or the financial institutions in one jurisdiction also differs from another jurisdiction. Such mutual trust or institutional trust constitutes a form of social capital which can be employed by the actors in a society to achieve their own interests. Studying the attitudes and behavior of the stakeholders in trust business might be one way to understand the issue regarding the location of trust property ownership beyond the ambits of abstract principles. In a broad sense, legal actions such as establishing or performing a trust contract are social actions, which are built on certain social conditions. By observing and expecting the existing and potential social actions surrounding the business, we are allowed to explain or design the legal norms that best fits with social reality.

145

See Sect. 2.3. In the point of view of this interpretation, the trustee has the ownership rights of trust property in name only, but does not have the power, responsibilities, or duties related to the trust property.

146

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In doing so, we firstly need conceptual tools for the description and explanation of social action, and secondly there is a need for empirical research to find out the social facts surrounding the business. Therefore, Chap. 4 describes the theoretical framework of the conceptual tools, namely social capital, social trust, and guanxi. And Chap. 5 discusses the methods utilized to do the empirical research on Chinese trust industry.

References Arai M (2013) Trust law in Japan: inspiring changes in Asia, 1922 and 2006. In: Ho L, Lee R (eds) Trust law in Asian civil law jurisdictions: a comparative analysis. CUP, New York, pp 27–45 Bolgár V (1953) Why no trusts in the civil law? Am J Comp L 2(2):204–219 Buckland WW (2012) A manual of Roman private law. CUP, New York Cameron E, de Waal M (2002) Honore’s South African law of trusts, 5th edn. Juta Cumyn M (2012) Reflections regarding the diversity of ways in which the trust has been received or adapted in civil law countries. In: Smith L (ed) Re-imaging the trust: trusts in civil law. CUP, New York, pp 6–28 de Waal M (2001) In search of a model for the introduction of the trust into a civilian context. Stellenbosch Law Rev 12:63–85 Graham T, Steeny P (2012) The Chinese trust. Trusts Trustees 18(1):36–42 Gretton GL (2000) Trusts without equity. Int Comp Law Q 49:599–620 Hahlo HR (1961) The trust in South African Law. S Afr Law J 78:195 Ho L (2004) The reception of trust in Asia: emerging Asian principles of trust? Sin J Legal Stud 2004:287–304 Ho L (2010) China trust law and practice since 2001. Trusts Trustees 16(3):124–127 Ho L (2012) Trust laws in China. In: Smith L (ed) Re-imaging the trust: trusts in civil law. CUP, New York, pp 183–221 Honor T (1987) Making law bind: essays legal and philosophical. Clarendon Press, Oxford Honoré T (2003) Trusts: the inessentials. In: Getzler J (ed) Rationalizing property, equity and trusts: essays in Honour of Edward Burn. Butterworths, London Hu G, Chen Q (2006) Quanneng fenge: lun woguo xintuofa zhi xintuo caichan suoyouquan (Separating the right and the power: trust property proprietary rights in Chinese trust law). J Zhengzhou Univ 39(6):84–88 Hudson A (2014) Equity and trusts, 8th edn. Routledge, Abingdon Lawson FH (1955) A common lawyer looks at the civil law. University of Michigan Press, Ann Arbor Lee R (2009) Conceptualizing the Chinese trust. Int Comp Law Q 58(3):655–669 Lepaulle P (1927) Civil law substitutes for trusts. Yale Law J 36:1126 Lorio KV (1982) Louisiana trusts: The experience of a civil law jurisdiction with the Trust. La Law Rev 42:1721–1739 Lou J (2012) Xintuo caichan de dulixing yu xintuocaichan guishu de guanxi (Relationship between the trust property segregation and the ownership of trust property). J Guangdong Soc Sci 2:242–250 Martin EF (1990) Louisiana’s law of trusts: 25 years after adoption of the trust code. La Law Rev 50:501 McAuley M (2012) Truth and reconciliation: notions of property in Louisiana’s civil and trust codes. In: Smith L (ed) Re-imaging the trust: trusts in civil law. CUP, New York, pp 119–182

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Meng Z (2015) Should China clarify the ownership of trust assets? A social network perspective. Trusts Trustees 21(5):492–500 Meng Z (2016) Legal certainty and trusts in China. In: Fenwick M, Wrbka S (eds) Legal certainty in a contemporary context: private and criminal Law perspectives. Springer, Berlin, pp 89–111 Pettit PH (1997) Equity and the law of trusts, 8th edn. OUP, Oxford Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China trust industry report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015 Qu CZ (2003) The doctrinal basis of the trust principles in China’s Trust Law. Real Prop Probate Trust J 38(2):345–376 Riddall J (1999) The law of trusts, 4th edn. OUP, Oxford Sese A (1999) Tairiku houiki shintakuhou saishin doukou (Latest trend of trust law in civil law jurisdictions). J Jpn Inst Int Bus Law 40(10):1507–1513 Sese A (2009) Comparative studies on the Trust Law of the PRC: taking into consideration of the enactment of the PRC Property Law and amendment to Japanese Trust Law, English and the U. S. Trust Law. Sci Rep Kyoto Prefectural Univ Public Policy 1:63–93 Schenkel K (2009) Trust law and the title-split: a beneficial perspective. Umkc Law Rev 78:181– 214 Smith L (2009) Trust and patrimony. Estates Trusts Pensions J 28:332–354 Smith L (ed) (2013) The worlds of the trust. CUP, New York Vicari A (2012) Country reports: San Marino. Colum J Eur Law Online 18:82. http://www.cjel. net/wp-content/uploads/2012/03/countryreport_sanmarino81–92.pdf. Accessed 16 Aug 2015 Wang Y (2008) Lun xintuofa yu wuquanfa de guanxi: xintuofa zai minfa faxi zhong de wenti (Relationship between trust law and property law: toward the questions of trust law in civil law system). J Peking Univ (Philos Soc Sci) 6:93–101 Watanabe H (2010) ‘Trusts without equity’ and prospects for the introduction of trusts into European civil law systems. Q Rev Corp Law Soc 7:187–200 Waters D (2006) The future of the trust (Part I). J Int Trust Corp Plan 13(4):179–223 Watkin TG (2007) Changing concepts of ownership in English law during the nineteenth and twentieth centuries. In: Dixon M, Griffiths GLIH (eds) Contemporary perspectives on property, equity and trust law. OUP, Oxford Wen S, Feng X (2005) Lun xintuo caichan suoyouquan (Ownership of trust property). Wuhan Univ J (Philos Soc Sci) 58(2):203–209 What is A Real Estate Investment Trust (“REIT”)? http://www.hektarreit.com/faq.php?question=1. Accessed 15 June 2015 Wu Y-C (2013) Trust law in South Korea: developments and challenges. In: Ho L, Lee R (eds) Trust law in Asian civil law jurisdictions: a comparative analysis. CUP, New York, pp 46–62 Yiannopoulos A (1999) Trust and the civil law: the Louisiana experience. In: Palmer VV (ed) Louisiana: microcosm of a mixed jurisdiction. Carolina Academic Press, Durham, p 213 Yu H (2010) Lun yingmei xintuo caichan shuangchong suoyouquan zai zhongguo de bentuhua (Localization of dual ownership of trust property in China). Mod Law Sci 32(3):159–168 Zhang C (2007) Woguo xintuo caichan suoyouquan guishu de taidu jiqi fali shenshi (An examination of the Chinese attitude towards the ownership of trust property). J Gansu Inst Polit Sci Law 91:7–14 Zhang R (2015) A better understanding of dual ownership of trust property and its introduction in China. Trusts Trustees 21(5):501–519

Chapter 4

Social Capital, Trust, and Guanxi (关系)

Abstract This Chapter begins with a brief introduction of the social capital theory. The explanations of social capital by three seminal figures—Pierre Bourdieu, James Coleman and Robert Putnam, who are considered to have contributed much to the conceptualization of social capital—are reviewed in the first section of this Chapter. At the same time, since Nan Lin has contributed to the theoretical development, devised measurements and conducted empirical research in the areas of social networks and social capital, this Chapter also reviews his point of view on the concept of social capital. Then, this Chapter moves on to another conceptual tool: social trust. It discusses the role of social trust in various terms, especially in economic growth. A pair of relevant concepts, namely “personal trust” and “institutionalized trust”, is explained in the second section. Further, this Chapter elaborates a distinctive notion of Guanxi in China, followed by the explanation on the impacts of Guanxi on the Chinese Business Culture. In light of these concepts, this Chapter proposes a hypothesis which can explain at least a part of the issue on ownership of trust property in China. In addition, a short section in this chapter explains the Social Network theory and the Social Network Analysis. The traditional approach of legal scholars views law as “a logical and internally coherent system in which correct legal decisions can be deduced by formal reasoning”.1 From a sociological perspective to law, law is regarded to be a social phenomenon, in other words, law is connected to the everyday life of people in a society, and law and social life are mutually influencing and interacting with one another. In Fundamental Principles of the Sociology of Law (1936), scholars developed a sociological approach to the study of law by means of focusing on how social networks and groups organized social life.2

1

Adelman and Foste (1992). See Ehrlich (1936).

2

© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2_4

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Contemporary researches on social capital are always linked to social networks. Social capital is to explain the good relationship between a pair of actors can be the resource for either or both actors to get profit from such relationship. Literature increasingly agrees on the broad impact of social capital upon people’s well-being, and many of sociologists discuss the ways in which social capital makes a difference to people’s behavior.3 Another conceptual tool is trust, which is defined by Coleman and Putnam as a key component of social capital.4 Francis Fukuyama even goes further, defining trust as a basic source of social capital.5 People need to trust one another in order to cooperate to achieve their goals, and expect that “if they cooperate, they will not be exploited or defrauded, but can at some time or other expect to benefit similarly in return.”6 It should be noted that trust is a complex and varied phenomenon, this chapter only considers this issue to the degree that it is relevant to the discussion of social capital. The distinction between the two potentially confusing terms of legal trusts and social trust needs to be highlighted here. The legal concept of trust is a legal device by which one person is enabled to deal with property for the benefit of another person or for a specific purpose7; while the social concept of trust is a choice to place oneself at risk or some danger when deciding whether or not to engage in an action.8 Social trust focuses on the relationship of actors within a society, the risk one actor takes depends on the performance of another actor.9 In the present chapter, if not provided otherwise, the term “trust” refers to social trust. Guanxi, as a distinctive social phenomenon in China, means at heart that networks play an important role in Chinese social life. Similar phenomenon can be found in any other society, but it is traditionally found everywhere in Chinese society and often emphasized by sociologists.10 This notion is relevant to the concepts of social capital and trust because the main thesis of the latter is applicable to guanxi network. Although there are scholars who claim that it is hard to say the guanxi phenomenon is unique to China, many observers and scholars recognize guanxi as something special or crucial within Chinese society.11 In this book, we assume that guanxi network exists in China’s trust business and is significant to the development of China’s trust industry.

3

Azami, The Sociological Approach to Law as Compared with the Traditional Conception of Law. http://www.agc.gov.my/pdf/publications/sociological_approach.pdf. Accessed 18 January 2015. 4 Field (2009), p. 70. 5 See Fukuyama (1995). 6 Field (2009), p. 70. 7 Restatement of the Law Third, Trusts (US, 2003), Part 1 Chapter 1 IN NT. 8 Luhmann (1979). 9 Coleman (1994). 10 See e.g. Chen (2003), p. 49, Cheng (2012), p. 97, Ai (2006). 11 For an extensive literature review, see Nathan (1993).

4.1 Theoretical Background: Reviewing Social Capital

4.1

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Theoretical Background: Reviewing Social Capital

In economics, the notion of capital (typically physical capital) refers to “the equipment and structures used to produce goods and services.”12 In the past decades, the economists have extended the concept of physical capital to include human capital as well.13 As pointed out by scholars, physical capital is “created by making changes in materials so as to form tools that facilitate production,” likewise, human capital is “created by changing persons so as to give them skills and capabilities that make them able to act in new ways.”14 Meanwhile, there has been an increasing acknowledgement in economic and sociology literature that interpersonal relationship should be considered as a form of capital, namely social capital, because interpersonal relationship is a resource derived from the society itself, which can “affect the productivity of individuals and groups.”15 Although it is not easy to clarify the meaning of social capital, we can, to some extent, understand this concept from its several interdisciplinary roots, each of which has a distinct emphasis in its conceptions. It’s noted that although those who are discussing social capital emphasize different aspects of social capital, they tend to share the core idea that social relationships have value. There are three seminal figures who contribute most to the conceptualization of social capital: Pierre Bourdieu, James Coleman and Robert Putnam.16 They represent three “relatively distinct tributaries” in the literature on social capital.17 Their explanations of social capital will be analyzed in the following sections. At the same time, since Nan Lin has contributed theory, devised measurements and conducted empirical research in the areas of social networks and social capital, especially focusing on the society of Taiwan which has certain degree of similarity with the society of mainland China,18 we will discuss his point of view on the concept of social capital as well.

4.1.1

Bourdieu

Pierre Bourdieu was an influential French sociologist, his interests focus on the ways in which society is reproduced,19 and how the dominant classes maintain their

12

Mankiw (2008), p. 406. See Schultz (1961), Becker (1993). 14 Coleman (1994). 15 See Coleman (1988), Putnam (2000), Stiglitz (2000). 16 Field (2009), p. 15. 17 Foley and Edwards (1999). 18 See Hsung et al. (2009). See also Lin et al. (2014). 19 In Pierre Bourdieu’s work, social reproduction described the way in which French education can be a tool to recreate society as a means to secure power for only certain kinds of individuals. See Bourdieu and Passeron (1990). 13

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position in the society.20 In Bourdieu’s view, there are three forms of capital, i.e. economic capital, cultural capital, and social capital. He contends that “economic capital is at the root of all the other types of capital, the cultural capital and social capital can be derived from economic capital”.He believes that capital should not be considered as solely in the one form recognized by economists, instead, “one should reintroduces capital in all its forms”, namely, economic capital, cultural capital, and social capital, otherwise it is impossible to deeply understand the structure and functioning of the society.21 According to him, Social capital is the sum of resources, actual or virtual, that accrues to an individual or a group by virtue of possessing a durable network of more or less institutionalized relationships of mutual acquaintance or recognition. (Bourdieu and Wacquant 1992, 119)

Social capital for Bourdieu is connected to the size of network and the volume of accumulated capital (economic, cultural, or symbolic) possessed by those to whom an individual is connected.22 In other words, the bigger the size of one’s connections is, and the higher the amount of capital in the possession of these connections is, the more social capital a member of a group has. In Bourdieu’s opinion, actors engage in and maintain links in a network to get the profits from membership in a network or group. These profits include “material profits, such as all the types of services accruing from useful relationships; and symbolic profits, such as those derived from association with a rare, prestigious group.”23 The potentiality for accruing social profit and control of capital are differentially distributed among individual or institutional actors in the social network, which is a kdy notion in Bourdieu’s theories of social reproduction and social space.24 Bourdieu views social space as a geographic or mathematical metaphor for how people are arranged in society.25 Social space has multiple dimensions (such as economic, educational, cultural, powerful, etc.) which can be categorized as a form of Capital. Social space is defined by the complex clustering of actor’s positions.26

20

Gauntlett (2011) Three Approaches to Social Capital. http://www.makingisconnecting.org/ gauntlett2011-extract-sc.pdf. Accessed 18 January 2015. 21 See Bourdieu (1986). 22 Bourdieu (1986). 23 Bourdieu (1986). 24 Tzanakis (2013) Social capital in Bourdieu’s, Coleman’s and Putnam’s theory: empirical evidence and emergent measurement issues. http://wh.agh.edu.pl/other/materialy/672_2014_04_23_ 13_04_24_Spcial_capital2.pdf. Accesed 18 January 2015. See also Bourdieu (1989). 25 See Bourdieu (1989). 26 Bourdieu (1989), p. 229. Bourdieu defines “social space” as: [A] (multi-dimensional) space constructed on the basis of principles of differentiation or distribution constituted by the set of properties active in the social universe under consideration, that is, able to confer force or power on their possessor in that universe.

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Actors are not equal in possessing and activating their resources in the society, because capital is a force for the dynamic change of the social space, but capital “takes time to accumulate” and “contains a tendency to persist in its being.” These inherent inequalities make actors more likely to stay in differentially advantaged locations in social space, competing for the appropriation of available scarce resources. The inequality resulting in the actors’ “predispositions” is rooted in the differential distributions of economic, cultural, social and symbolic capital. These “predispositions” function to legitimate the structure of differential awards and provide the means to perceive the structure.27 According to Bourdieu, all forms of capital act in two ways simultaneously “by being organically-related to positions in social space”. For one thing, they reproduce all forms of capital, for the other thing, they use these resources to embed the actor’s position further. For instance, rich or powerful parents can make use of their social relationships to send their children to better schools where the children can establish connections with their classmates rich in capital as well, and eventually when they grow up, they are in better positions in social space, compared with their counterparts whose parents are lower class in the society. Therefore, Bourdieu points out, positions of actors are both the cause and the effect of all forms of past accumulations of capital, particularly social capital. Social capital can be seen as a “credential” that perpetuates social inequality by providing differential entitlements to credit.28 Therefore, social capital along with other forms of associated capitals “explains the structure and dynamics of differentiated societies.”29 Bourdieu’s conception of social capital explains how those at the top of social hierarchies can hold onto their position through a range of techniques. It is generally considered that Bourdieu starts the research of social capital from the perspective of social network. From this perspective, network creates valuable resources to solve social problems. This conceptualization of social capital could shed light on the research in this book to explain why trust business is booming in recent years and how financial service providers build their connections with potential investors.

4.1.2

Coleman

In the late 1980s and early 1990s, the well-known sociologist in the U.S., James Coleman, also introduced the concept of social capital in his research of educational

27

Tzanakis (2013) Social capital in Bourdieu’s, Coleman’s and Putnam’s theory: empirical evidence and emergent measurement issues. http://wh.agh.edu.pl/other/materialy/672_2014_04_23_ 13_04_24_Spcial_capital2.pdf. Accesed 18 January 2015. 28 Bourdieu (1986), pp. 248–249. 29 Bourdieu and Wacquant (1992), p. 119.

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attainment and performance. In his book Foundations of Social Theory, social capital is defined as [T]he set of resources that inhere in the structure of relations between persons and among persons, and is lodged neither in individuals nor in physical implements of production. (Coleman 1994, 302)

Coleman defines social capital from a functional perspective. In his point of view, “the value of the concept of social capital lies primarily in the fact that it identifies certain aspects of social structure by their function.” According to him, the function of social structure identified by the concept “social capital” is that those aspects of social structure have value to actors, because they are resources that can be used by the actors to realize their interests.30 As he states in his book, functionally, “social capital is not a single entity,31 but a variety of different entities having two characteristics in common: they all consist of some aspect of a social structure, and they facilitate certain actions of individuals who are within the structure.”32 Social capital is “productive” to actors (either individual or institutional actors), making possible the achievement of certain goals which would be impossible in the lack of it. Coleman provides an example of the relation between physician and patient. Usually, the patient places trust in the physician, and the physician employs medical skills in the interest of the patient. But in the U.S., there was great increase in the number of malpractice suits brought by patients against physicians in the court, which indicated the decline in trust of patients to physicians. This has caused the increase in the cost of medical care for certain treatments in the U.S. Coleman concludes that “this decline in trust and the increased willingness to file suit against a physician after a medical treatment has had a bad outcome result from a lack of those social relations on which trust depends and lead to increased cost and reduced availability of medical care.”33 Coleman discusses several aspects of social relations that constitute useful resources, such as obligations and expectations, information channels (i.e. networks or friends), norms and effective sanctions (i.e. norms of high achievement, sanctions against crime in a neighborhood), authority relations (social capital is concentrated in one person), and social organizations and their side products (i.e. a parent-teacher association).34 For instance, in Coleman’s explanation, the obligation to reciprocate a favor done by an actor A to an actor B constitutes a “credit slip” for actor A. This credit slip is redeemable in the network within a time frame such expectations and information define. That it will be redeemed in the future is based on the trust produced by that part of the social structure that has provided the resource, i.e. the

30

Coleman (1994), p. 305. Here, the wording “entity” does not refer to a legal entity such as a corporation, or partnership etc. Rather, it means social-structural resource. 32 Coleman (1994), p. 302. 33 Coleman (1994), p. 303. 34 Coleman (1988). See also Coleman (1994), pp. 306–313. 31

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existence of the nexus of relations. Credit slips can theoretically be amassed turning social capital into a fungible resource.35 Thus, social capital can be utilized to achieve ends for actors in contexts other than the ones the obligation was initially incurred. For Coleman, social capital exists in all kinds of social relations, particularly within the family or community social organizations. Coleman give a wide range of examples from the neighborhood norm of watching out for neighbors’ children to parental involvement in school matters. Coleman thinks that social capital requires an element of embeddedness in social structure. Embeddedness is a notion that Coleman has adopted from Granovetter (1985).36 He sees social capital as essentially residing in the social structure of relationships among people, which distinguish social capital from both financial and human capital. Social capital is created when relations among persons change in ways that facilitate action of the actors. As Coleman states, “physical capital is embodied in observable material form, human capital is embodied in the skills and knowledge acquired by an individual, social capital is embodied in the relations among persons.”37 For Coleman, social structure has existed before the actor who can use embedded social capital as a resource, and social relationships which come into existence when individuals attempt to make best use of their individual resources may be seen as resources for the individuals.38 Coleman contends that, depending on the context, social capital may have different pay‐offs to the individuals who involved in the social relationship, as well as to the collective as an externality of the social interaction. In the latter sense, social capital is a public good and a by‐product of social interaction. For Coleman, social capital acquires the nature of a public good. Direct contributions by actors within the social structure will benefit the whole. He sees social capital as a bonding mechanism which adds to the integration of social structure. Strong families or communities accrue from strong social bonding among members. As discussed above in this section, Coleman’s approach leads to a broader view of social capital, where it is not regarded only as stock held by powerful elites, but notes its value for all kinds of communities, including the powerless and marginalized.

4.1.3

Putnam

Putnam’s view of social capital builds upon Colema’s work. He adopts Coleman’s (1988) link between the lack of strong family and community ties and the intergenerational decline of social capital in the U.S. But his explanation has a narrower

35

See Coleman (1994), p. 306. Coleman (1994), p. 302. 37 Coleman (1994), p. 304. 38 Coleman (1994), p. 300. 36

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focus on specific aspects of social interactions that matter for well‐performing governments and ultimately for democracy. His definition of social capital is: [B]y ‘social capital’ I mean features of social life - networks, norms and trust - that enable participants to act together more effectively to pursue shared objectives. (Putnam 1996b, 56) The core idea of social capital theory is that social networks have value… social contacts affects the productivity of individuals and groups. (Putnam 2000, 19)

In Putnam’s point of view, the ingredients of social capital (i.e. networks, norms and trust) reduce the information costs about the trustworthiness of other citizens and foster cooperation. Associations, voluntary organizations, and mass‐based political parties are considered by Putnam to represent such networks and they inculcate such norms and trust. As he put it, in conditions where public life is organized hierarchically, engagement in horizontal social and cultural associations hardly exist, and thus norms of trust and cooperation cannot prevail. In this view, social capital has mostly positive civic attributes as a societal resource that links citizens to each other and enables them to pursue their common objectives more effectively. Social capital taps the potential willingness of citizens to cooperate with each other and to engage in civic endeavors collectively. In later formulations of his work,39 Putnam broadens the concept of social capital to include a variety of other types of social interactions such as the writing of greeting cards, families eating together, or entertaining friends at home. This later formulation emphasizes the overall importance of social interactions, and retreats from the view of social capital as civicness.

4.1.4

Nan Lin

Nan Lin is a professor of sociology in Duke University. He contributed a lot to the research on social capital, especially about the society of Taiwan because of his Taiwanese background. He organized many research projects on the comparison of societies in various countries.40 Nan Lin and his associates offer a different sociological conceptualization of social capital.41 Social capital is seen by Lin as an investment in social relations with an expected return in the marketplace.42 Social capital is also characterized as

39

Putnam (2000). See also Putnam (1993a, b, 1996a, b). See Lin et al. (2014). 41 Lin (2001), See also Lin et al. (2001). 42 Lin (2001), p. 19. 40

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Table 4.1 Similarities and differences between various approaches to social capital Definition

Which aspects of social interactions are important Benefits

Coleman

Putnam

Lin et al.

Aspects of social structure that provide resources to actors to fulfill their interests Closure, norms, values

Networks, norms of reciprocity, and trust for mutual collective benefit

Investment in social relations with a return in the marketplace

Selected dimensions: horizontal versus vertical structures, selected networks, generalized trust and reciprocity Solves collective action problems (collective pay‐offs; effectiveness of democratic institutions; economic development) Not necessary

Several aspects of social interactions, e.g. density of networks, resources in networks

Various individual and collective benefits (often focuses on human capital benefits), also externalities Somewhat

Awareness of benefits See Castiglione et al. (2008), p. 659

Individual nature: jobs, promotions, economic resources, etc.

Purposeful

the resources that are embedded in social networks. The view that social relationships have value or offer resources stems from the fact that they enhance the flow of information, allow for the possibility of influence, and offer social credentials or reputation and emotional reinforcement.43 Most importantly, actors are cognitively aware of these resources and consciously choose to access them. Social capital thus becomes a conscious investment in one’s social networks.44 Social scientists have offered a number of definitions of social capital. While they are broadly similar, they talk in the same context. According to the explanations outlined above, there are important differences of perspective between these three most well-known scholars (Bourdieu, Coleman, and Putnam). In brief, Bourdieu shows a concern with questions of unequal access to resources and the maintenance of power; Coleman takes as his starting point the idea of individuals acting rationally in pursuit of their own interests; Putnam has inherited and developed the idea of association and civic activity as a basis of social integration and well-being. Despite the differences, all three consider that social capital consists of personal connections and interpersonal interaction, together with the shared sets of values that are associated with these contacts.45 Table 4.1 illustrates the similarities and differences between some selected approaches to social capital, namely, approaches by Coleman, Putnam, and Lin and others.

43

Lin (2001), p. 20. Erickson (2001). 45 Field (2009), pp. 15–16. 44

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The concept of social capital has its critics. Critics argue that the term “social capital” is vague, hard to measure, poorly defined and perhaps not even a form of capital at all. Though, social capital provides a framework for thinking about social structures as facilitators of effective action by individuals and groups, and a way of focusing discussions of the different kinds of benefits conferred by different structures.46

4.1.5

Application of the Concept of Social Capital to Academic Areas

Despite the debate, social capital is a concept that is attractive in various academic areas. Sociologists focus on the effects of social networks on personal benefits,47 whereas political scientists are mostly concerned with the consequences of the density of voluntary associations and networks and the spread of generalized trust on a variety of societal outcomes,48 while economists analyze its potential economic impacts.49 Social capital has informed the study of families, youth behavior problems, schooling and education, public health, community life, democracy and governance, economic development, and general problems of collective action.50 Political science places more stress on social capital as a collective concept, which influences outcomes such as democracy, institutional performance, and social cohesion. From this perspective, what constitutes social capital to a set of parents, for example, is not so much their relationship with one specific neighbor in their town who watches out for their children at the playground. Instead, the focus is on the wide distribution of cooperative values, norms, and attitudes that constitute the social capital of a town, city, region, or larger unit. These resources benefit the collective and the wider society.51 Although in political science, social capital is mostly viewed as a collective resource, several studies show its beneficial effects at the individual level as well. For example, not only do trustors engage in mutually beneficial relations more frequently,52 but they are generally more socially active, engaged, tolerant, and 46

Easley and Kleinberg (2010), p. 62. Castiglione et al. (2008), p. 659. 48 Castiglione et al. (2008), pp. 659–660. Political science places more stress on social capital as a collective concept, which influences outcomes such as democracy, institutional performance, and social cohesion. 49 Field (2009), pp. 558–560. 50 Adler and Kwon (2013), p. 49. For overviews, see Jackman and Miller (1998), and the World Bank’s “Let’s Talk Social Capital” internet discussion group and its social capital website at http:// www.worldbank.org/poverty/scapital/index.html. Accessed 18 May 2015. 51 Castiglione et al. (2008), p. 660. 52 Matsuda and Yamagishi (2001). 47

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more inclined to support liberal rights such as minority rights and free speech.53 Such individuals are also more likely to serve jury duty in the United States,54 an important behavioral indicator of cooperation. Experimental evidence shows fairly conclusively that generalized trust matters for cooperation, especially in one‐shot situations and in multiple n‐person games, and trustors are more likely to give people a second chance.55 Clearly, generalized trust is an advantage to people and societies that possess it, as trustors are more likely to initiate cooperative relations that might be beneficial for themselves as well as for their social environment, which benefits from cooperation.56 Economists view generalized trust and other attitudinal aspects of social capital as associated with economic development and growth. Fukuyama claims that a lack of generalized trust prevents the building of large‐scale professionally managed modern economic organizations.57 Knack and Keefer demonstrate how trust (and not voluntary associations) is an important predictor of economic growth.58 Zak and Knack show that even controlling for various institutional aspects that facilitate investment and growth, such as the protection of property rights, contract enforceability, and the lack of corruption, generalized trust is still an important additional predictor of economic growth.59

4.2

Substantial Value of Social Trust in Establishing Commercial Relationships

Coleman and Putnam were as one in defining trust as a key component of social capital.60 Coleman was studying on the importance of trust in economic life as early as 1980s, and criticizing that economists ignored the qualitative change that occurs in the transition from the micro level of the individual to the macro level of a system composed of individuals.61 In Putnam’s definition of social capital, trust itself is an important element. Yet there are commentators who doubt whether trust is to be treated as an integral component of social capital or as one of its outcomes. This section does not aim to identify the relationship between trust and social capital. The author admits that trust is certainly related closely to social capital, and it is one

53

Uslaner (2002). Uslaner (2002). 55 Matsuda and Yamagishi (2001). 56 Castiglione et al. (2008), p. 660. 57 Fukuyama (1995). 58 Knack and Keefer (1997). 59 Zak and Knack (2001). 60 Field (2009), p. 70. 61 See also Swedberg (1996). 54

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of the most important resources that arise from membership in social networks. However, the first question in researching trust concerns its conceptualization.

4.2.1

An Understanding of Trust: A Choice to Place Oneself at Risk

Numerous economic or sociological researches have focused on the elusive notion of trust. Seppanen et al.62 in their review found that there are over 70 definitions of the concept of trust.63 As debates on definitions of trust continue, this section is not therefore intended to clarify the meaning of trust, instead, we take a specific understanding of trust in order to conceptualize trust in the context of this book, adopting Luhmann’s understanding64: “[Trust] is an attitude that allows for risk-taking decisions.”65 In Luhmann’s opinion, “[t]rust… presupposes a situation of risk”, “trust is only possible in a situation where the possible damage may be greater than the advantage you seek.”66 It is a way people assert expectations, presupposes a situation of risk and the possibility of disappointment, which depends partically on our own previous behavior and choices.67 The distinction between trust and confidence has been one of the central elements in Luhmann’s inquiry. Both of these notions are related to the expectations which may or may not result in disappointments. Trust and confidence are different ways in which people gain a sense of self-assurance, or act in the face of uncertainty.68 Confidence means that general expectations will not end in disappointment: e.g., that the car will not run over you, that there is no need to carry the gun every day, or that the banking system will not collapse. In other words, confidence is associated to surrounding dangers and contingent events that individuals cannot influence. In most cases individuals do not even have their own opinion about surrounding dangers and therefore simply ignore them.69 In order to draw the line between confidence and trust, Luhmann highlights the ability to distinguish dangers and risks. This is not a matter of probabilities, but individual’s previous behavior. Dangers exist naturally and are independent from

62

Risto et al. (2007). Lyon et al. (2006), p. 2. 64 Some of the most prominent inquiries of the function of trust were pursued by Niklas Luhmann. Luhmann became famous mainly because of his theory of social systems which aims to untangle the problem of “unmanageable complexity.” See two works of Niklas Luhmann: Luhmann (1979), Luhmann (2000), pp. 94–107. 65 Luhmann (2000), p. 98. 66 Luhmann (2000), p. 98. 67 Kramer and Tyler (1996), p. 178. 68 Kramer and Tyler (1996), p. 178. 69 Teramoto and Jurčys (2013). 63

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the choices of people (e.g., traffic accidents cannot be reasonably anticipated). On the other hand, risk underlies situations in which individuals have to make choices.70 If people do not consider alternatives, they are in a situation of confidence. If individuals choose one action in preference to others in spite of the possibility of being disappointed by the actions of others, they define the situation as one of trust. In the case of confidence, you will react to disappointment by external attribution and alienation. In the case of trust, you will have to consider an internal attribution and eventually regret your trusting choice. Without trust, risk is avoided, innovative activities dry up, only routine actions are available for retrospective sense-making, and uncertainty remains unresolved.71 In this light, we understand trust in this book as a choice to place oneself at risk when deciding whether or not to engage in an action. With trust, an individual is willing to risk losing personal interests because of an expectation that the other party in the transaction will not take advantage of them.72 The role of trust in economic growth has been deeply explored by sociologists. Since we assume that (social) trust is essential in explaining the development of China’s trust business, the next section is going to offer a brief review of the literatures on the role of trust in economic growth.

4.2.2

Role of Trust in Economic Growth

According to Coleman, trust plays an important underlying role in social interaction. Trust should be perceived as social capital, which can be best understood through its function in facilitating certain actions without which such actions would not be possible.73 For Granovetter, trust is one of the factors that determine the contract form of a transaction by influencing its associated transaction costs, and trust is necessary for initiating any kind of transaction.74 A minimum mutual trust is needed on the part of economic actors who face uncertainty in a transaction because institutional mechanisms are unable to protect them completely. Uncertainty is unavoidable, especially in a long-term transaction, so it is necessary to trust the other party not to take advantage of this uncertainty.75

70

Teramoto and Jurčys (2013). Kramer and Tyler (1996), pp. 178–179. See also Luhmann (2000), pp. 97–98. 72 Luo and Yeh (2009), pp. 121–122. 73 Coleman (1984), p. 307. 74 Granovetter (1985). 75 Luo and Yeh (2009), p. 120. 71

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Francis Fukuyama is among the leading thinkers of trust and economic development. In his best-selling book Trust: The Social Virtues and The Creation of Prosperity, he argues the level of trust can impact the economic development by lowering transaction costs. Lower levels of mutual trust (or insufficient social capital) cause higher transaction costs in a society. If people trust one another because they are all operating according to a common set of ethical norms, doing business costs less. Such a society will be better able to innovate organizationally, since the high degree of trust will permit a wide variety of social relationships to emerge. People who do not trust one another will end up cooperating only under a system of formal rules and regulations. This legal apparatus, serving as a substitute for trust, entails what economists call “transaction costs.” Distrust therefore imposes a kind of tax on all forms of economic activity.76 Fukuyama classifies the world’s economy by the level of trust into high trust societies and low trust societies. For example, US, Germany, and Japan are categorized as high trust societies, which were first to develop large, modern, professionally managed corporations. Low trust societies such as Taiwan, Hong Kong, France, and Italy are characterized by small family businesses.77 As an example of how trust influences build-up of social capital—and how social capital influences build-up of economic competence and, consequently, an opportunity for empowerment and growth—Fukuyama offers the example of Italy. Northern and southern Italy, despite being under the same national regulations, have developed quite differently. Trust and social capital, Fukuyama believes, are the factors that have spawned the industrial success of the North. Fukuyama explains in his book: It is clear that the high degree of social capital in northern and central Italy has been critical in explaining their greater economic prosperity… At the time of unification in 1870, neither northern nor southern Italy was industrialized… But industrial development took off rapidly in the North, while the South actually became slightly less urban and industrial between 1871 and 1911. Per capita incomes in the North moved steadily ahead, and the gap between regions remains high today. These regional variations cannot be explained adequately by differences in government policy, since that has (for the most part) been set nationally since the emergence of a unified Italian state. They do, however, correlate very strongly with the degree of civic community or of spontaneous sociability that prevails in the respective regions. There are family firms in all parts of Italy, but those in the high-social capital center have been far more dynamic, innovative, and prosperous than those in the South, characterized by pervasive social distrust. (Fukuyama 1995, p. 104)

This can serve as a case illustrating Coleman’s argument that urban areas are marked by a high degree of social disorganization, or, in other words, by a lack of social capital.78

76

Fukuyama (1995), p. 27. Fukuyama (1995), p. 27. 78 Coleman (1994), pp. 306–307. 77

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4.2.3

91

Personal Trust Versus Institutionalized Trust

Many scholars have proposed a typology of trust.79 Trust is not only based on face-to-face relations between two or more people. It can be an attribute of institutions and groups as well as individuals, and is often based on reputation which is mediated through third parties.80 Trust research has identified two major concepts, namely personal and institutional trust. Personal trust signals trust at the individual level, which is limited to an individual’s own observation and experience over time of a particular actor’s trustworthiness. High levels of personal trust mainly reflect repeated positive experiences made over time and longstanding relations, building on initial knowledge about the partner.81 Personal trust quantifies a person’s confidence in the other party in terms of a rational calculation of personal costs and benefits. It is based on familiarity with the other party resulting from frequent interaction, a process in which there are repeated games involving power, hostages, and cost-benefit analysis.82 Institutional trust reflects the functioning of the overall political, legal or economic framework and its informal rules, with low levels of institutional trust generally taken as indicators for a deficient institutional framework.83 It is also called general trust by scholars, because no person in particular is specified as the one being trusted. Institutional trust is suggested as the foundation for risk-taking behaviours in the initial stage of social relations.84 Institutional factors, including legal forms and societal norms, build a person’s confidence in the institutional mechanisms that make the other party honest and consistent.85 The source of trust in the daily management of modern corporations is not necessarily rooted in social relations or personal feelings. Instead, trust is often gradually built up through the process of cooperation between two institutions. The network governance of industries utilizes more systematic and institutional control mechanisms and performance evaluations. This is very different from the small and medium-sized firms in the industry, which tend to complicate relationships with personal feelings, and where it is difficult to restore a relationship once it breaks down.86

79

Zucker defined three types of trust, process-based, characteristic-based, and institutional-based. See Zucker (1986). Shapiro, Sheppard, and Cheraskin proposed three categories of trust: deterrence-based, knowledge-based, and identification-based trust. See Shapiro et al. (1992). 80 Field (2009), p. 71. 81 Welter and Alex (2012), p. 51. 82 Williamson (1996). 83 Welter and Alex (2012), p. 51. 84 Luo and Yeh (2009), p. 122. 85 Luo and Yeh (2009), p. 122. 86 Luo and Yeh (2009), pp. 115–116.

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As sociologists point out, with social complexity comes alienation of individuals, as the personal trust relationship among members of society is replaced by institutionalized trust among social groups and individuals without kinship or other personalist ties. Increased complexity of society permits creation of increasingly diverse and broad relationships beyond those of kinship and community.87 However, this replacement is “partial” and “incremental”.88 These two concepts of personal trust and institutional trust contribute to the core analysis of this book, as I will show in Chaps. 5 and 6. The next section of this chapter will disclose a unique phenomenon in China, Guanxi, which is relevant to the concept of personal trust and institutional trust.

4.3 4.3.1

Guanxi: An Unique Phenomena in China The Notion of Guanxi

In order to observe and describe the Chinese society, the notion of guanxi cannot be missing. Compared with Western views of relationships that tend to focus on relationships between and among organizations, the Chinese notion of guanxi is based more on the development of relationships at the personal level.89 In Chinese, guan (关) means a door, or “to close up” with those who are inside a group, and xi (系) can be interpreted to mean a joined chain. Thus, together, guanxi can be translated as relationships and connections. In all the Chinese dominated societies in Asia, people use the word guanxi to speak of someone who knows lots of people, who is well connected, and gets things done, not necessarily through formal channels.90 The research on guanxi has been a hot topic among sociologists and economists. It is practically important for western businessmen to have a general understanding of Chinese guanxi culture. In his outstanding Harvard book Inside Chinese Business (2001), Ming-Jer Chen laid out the essence of the Chinese way of doing business. Interestingly, Chen portrayed a person’s guanxi network based on concentric circles, as illustrated in Fig. 4.1. An inner circle representing the immediate family is the closest possible relationship in the Chinese context. A middle circle then exists consisting of close friends and extended family. Kinships, sworn brotherhoods, friendships between classmates, close friends, and the relationships between teacher and students are all included. An outer circle represents non-family affiliates with whom one has little relationships or connections with.

87

Potter (2002), p. 182. This opinion will be explained in detail in Chap. 7 of this book. 89 Cheng (2012), p. 97. 90 Ai (2006). 88

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Fig. 4.1 Interlocking guanxi network91

Accordingly, there are three types of guanxi in the Chinese egocentric social network, as shown in Fig. 4.2, simulated familial guanxi, familiar guanxi, and weak guanxi.92 Three different moral standards and behavioral patterns apply for the three categories: simulated familial guanxi follow the “rule of need”; familiar guanxi fit the “rule of favor exchange”; and weak guanxi fall under the “rule of equity”. In each category of guanxi, we can find behavior indicating the presence of trust.93 As shown in Table 4.2, the Chinese concept of guanxi differs from the Western notion of social ties in several ways. Chinese guanxi is about personal trust, and it is dynamic with the change of society. With the complexity of society, guanxi may play less important role in social actions, but it would be extremely slow to be replaced by institutional trust.

4.3.2

Impacts of Guanxi on Chinese Business Culture

It is a belief of the Chinese business people that trust should be a central mechanism and lubricant in complex business networks. Trust underlines the differentiated order of one’s guanxi network: the higher the level of trust between two parties, the better the guanxi quality will be. Trust can significantly enhance buyer-seller

91

Chen (2003), p. 49. Hwang (1987). 93 Luo and Yeh (2009), p. 122. 92

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Fig. 4.2 Three categories of Chinese guanxi and trust in each category94

Table 4.2 Chinese-western networking differences Chinese guanxi Personal relationships have organizational implications, and vice versa Personal and trust-based Symbiotic relationship between net-worked organizations Motivated by economic and social concerns Flexibility and informality See Chen (2003), p. 64

Western social ties Clear distinction between individual and organizational relationships Contract-oriented High independence of networked organizations Motivated primarily by economic concerns Formality and clearly defined roles

relationships among Chinese business people. This is because trust is treated as of fundamental importance by the Chinese and it is required at the initial stage of any business relationship.95

94

Luo and Yeh (2009), p. 123. Cheng (2012), p. 87.

95

4.3 Guanxi: An Unique Phenomena in China

95

For the Chinese, a formal contract is more likely to be drawn up at a later stage after some degree of mutual trust has been established. Trust represents one of the most highly respected elements in Chinese business relationships, as it helps to smooth transactions and prevent risks in an environment where legal regulations tend not to be fully exercised.96 Guanxi is used to develop a high degree of mutual trust between business partners. Guanxi encompasses the use of close friends and associates, a network of intermediaries in assisting with general business activities. Such use of friends and associates can help a businessman or a company to establish new contacts and expand its original network, which leads to more business opportunities. Socializing is used for the purpose of developing and nurturing business connections on a long-term basis. This explains why wining and dining after meeting is such a common practice by the Chinese. Chinese business people may use government officials to help overcome legal and administrative hurdles (e.g. use guanxi to obtain licenses or capital controlled by governmental employees). A major factor motivating the efforts to form guanxi revolved around the prevalent shortages of everyday necessities, so the Chinese develop guanxi to obtain resources.97 The exceptional emphasis on trust among the Chinese comes from the environmental uncertainties. For the Chinese, giving favors, and thus saving credits in others’ “favor accounts,” is the best hedge against future uncertainties.98 This has to do with a Chinese cultural awareness of uncertainty and the function of good relations as a safeguard against such uncertainty.99 In countries where business standards and legal regulations are not fully exercised, trust consequently plays a more significant role. It helps facilitate a smoother and more efficient transaction as well as eliminating opportunistic behavior and risks. In short, trust limits the possibility of opportunistic behavior in a business environment that lacks strict enforcement of the law and becomes an asset which is greatly valued among the Chinese.100

4.4

Social Network Theory

Social Network theory is a perspective to observe the society as a network in which the human beings, companies, other entities are the nodes, while their relationship are the lines connecting them. Social network analysis (SNA) is the methodology to

96

Cheng (2012), pp. 90–91. Cheng (2012), p. 87. 98 Luo and Yeh (2009), p. 131. 99 Luo and Yeh (2009), p. 134. 100 Cheng (2012), pp. 90–91. 97

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find out the relationship between actors and/or its impact by describing the society as a network. Networks are at the heart of such discussions, both in the way they link different groups and thereby enable the fusion of different sources of information residing in these groups.101 Because of the limited data, we are not going to conduct SNA in this research, but a few words on this method are still helpful to the analysis in our later chapters. The studies on social capital from the perspective of SNA are focusing on the consequences of social networks and how specific structural attributes of the network, such as weak ties and dense structure, correspond to various outcome variables, such as one’s ability to become more successful than others or one’s ability to rise in the social ladder. From the perspective of SNA, social capital refers to the value found within social networks as well as the value one gains access to through social networks.102 Researches in social capital in the community level suggest that social capital can reproduce itself and hence leading to more social capital, or the reverse, i.e., declining social capital can result in even less social capital. In the individual level, various studies found that individuals whose networks were richer in resources tended to have better outcomes. For example, a research by Nan Lin et al. suggested that individuals with a greater number and/or wider range of friends in different occupations, or who have friends in high-ranked occupations, were likely to have better occupational outcomes as they are able to gain various resources provided by their networks.103 Social network analysis provides toolkit of concepts for understanding social networks, in this case trust business in China. SNA analyzes social events through discovering related actors and relationship between them (the set of actors and their relationship constitutes a so-called social network model) and assessing this model from various perspectives. Instead of placing an emphasis on rules, social networks analysis provides a set of tools for fact-finding. In other words, rather than trying to squeeze in a given factual situation to a particular legal rule, social network analysis calls for a more subtle observation of the situation at hand and the surrounding society in general. Social network analysis provides for concepts and tools to identify the participants and their relations. Instead of legally imposed attributes of participants such as “seller”, “buyer”, in social network analysis, each participant is identified by using abstract terms (“vertex”, “node”, or “actor”). Social network analysis begins with the notion of a dyad that demonstrates the relationship between two actors. A dyad represents the smallest unit of social interaction, where there may be

101

Easley and Kleinberg (2010), p. 62. Prell (2012), p. 62. 103 See Lin et al. (2001). 102

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97

one-sided relationships, or directional relationships. However, the simplest model of a “society” is a triad which demonstrates the relationship among three or more members. SNA offers a dynamic perspective by offering tools to visualize the relationship between several actors and showing how these relationships evolve over time. The ties between different actors are visualized by drawing a sociograph which illustrates existing actors and the relationship between them.104 The presence of mutual friends puts the interactions between two people “on display” in a social sense, even when they are carried out in private; in the event of misbehavior by one of the two parties to the interaction, there is the potential for social sanctions and reputational consequences from their mutual friends.105 Research on social capital from a social networks perspective tends to focus on how certain structural features of the social network, for example weak, bridging ties or strong ties and dense structures, correspond to a variety of different outcome variables, for example, one’s ability to “get by” as compared to “getting ahead”.106 The network serves an important function in the development of social constraint directing information flows in the building and maintaining of social capital. The network plays an important role in building and maintaining social capital. Take a closed network and open network as examples. Members of closed networks are connected to each other, as illustrated in Figure 3.4, triad “16-300.”107 A closed network enables cooperation between members, as each actor has access to social capital.108 In contrast, at the other extreme is an “open” network, see configuration of triad “1-003” in Fig. 4.3. In an open network, actors cannot rely from one on social capital because they are disconnected another, therefore, cooperation is more difficult to achieve. An actor embedded in a closed network is constrained to be more cooperative than a comparable actor embedded in an open network. Similarly, embeddedness in dense networks leads to effective cooperation.109

104

See Prell (2012). See also Teramoto and Jurcys (2013). Easley and Kleinberg (2010), p. 59. 106 Prell (2012), p. 62. 107 Coleman characterizes the extreme case of a fully connected network as “closed”. 108 Walker et al. (2013), p. 176 109 Walker et al. (2013), p. 176. 105

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Fig. 4.3 Triad types110

4.5

Hypotheses

The concepts discussed above shed lights on the legal debate regarding ownership of trust assets in China. China’s trust business has been growing dramatically since 2007. Seemingly, trusts can function effectively in China without a clear assignment of ownership of trust assets. But it is necessary to do research on whether this rapid growth is a temporary phenomenon or not. Therefore, we are not going to following the conventional approach which tries to answer the question “who is the owner of trust property in China?” Rather, the author adopts a new perspective to explain why Chinese trust business has grown rapidly even in lack of legal certainty regarding the location of ownership of trust property, and further to predict under what conditions is the time ripe to clarify the law. The starting point is the assumption that (social) trust as social capital functions as one of the facilitators of the growth in China’s trust business. In the case of

110

de Nooy et al. (2005), p. 207.

4.5 Hypotheses

99

China’s trust business, to transfer the trust property in spite of legal uncertainty is to choose to place oneself at risk of losing ownership. It is submitted that trust business model in China relies heavily on guanxi, which makes the business a dense network. Hence, the author’s Hypothesis I is: Social capital could alleviate negative impact of legal uncertainty. Although the location of ownership to trust property in China is uncertain, investors are willing to transfer their property to trustees, because the relations between settlor and trustee can facilitate high degree of mutual trust as social capital. However, with the transformation of transaction structure of trust business in recent past and near future, the growth of business needs to rely more on institutionalized trust besides guanxi. Thus, the author sets the Hypothesis II as: the social structures among actors (such as settlors, trustees, and third parties) are likely to change from a dense network to a sparser network, decreasing the level of social capital, which enhances people’s unwillingness to transfer the ownership of property. Law could play an important role in cultivating institutional trust among citizens and institutions, but the law cannot much deviates from the existing conditions. Hypothesis III It is reasonable for the Chinese legislators not to make clear the location of ownership to trust property, instead, they leave it to market solution and accumulation of cases. At this stage, consideration that could be made for this problem is, in order to facilitate the growth of China trust industry, to find ways to increase social capital between potential investors and institutions doing trust business. When the institutional trust is accumulated to a certain degree, it is time to promote the legal certainty.

4.6

Interim Conclusion

According to the explanations outlined in this chapter, there are important differences of perspective between the three most well-known scholars (Bourdieu, Coleman, and Putnam). In brief, Bourdieu shows a concern with questions of unequal access to resources and the maintenance of power; Coleman takes as his starting point the idea of individuals acting rationally in pursuit of their own interests; Putnam has inherited and developed the idea of association and civic activity as the basis of social integration and well-being. Despite the differences, all three consider that social capital consists of personal connections and interpersonal interaction, together with the shared sets of values that are associated with these contacts. In this chapter, social trust is understood as a choice to place oneself at risk when deciding whether or not to engage in an action. With trust, an individual is willing to risk losing personal interests because of an expectation that the other party in the transaction will not take advantage of them. The research from the perspective of social capital and trust suggests that trust has substantial value in establishing commercial relationship between businesses and consumers. In order of people to

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cooperate to achieve their goals, they need to trust one another, and expect that if they cooperate, they will not be exploited or defrauded, but can at some time or other expect to benefit similarly in return.111 Research on social capital from a social networks perspective tends to focus on how certain structural features of the social network, for example weak, bridging ties or strong ties and dense structures, correspond to a variety of different outcome variables. The network plays an important role in building and maintaining social capital. Guanxi, as a distinctive social phenomenon in China, means at heart that networks play an important role in Chinese social life. In China, business standards and legal regulations are not fully exercised, guanxi consequently plays a more significant role. It helps facilitate a smoother and more efficient transaction as well as eliminating opportunistic behavior and risks in China. In this chapter, it is hypothesized by the author that: (1) Social capital could alleviate negative impact of legal uncertainty; (2) The social structures among actors (such as settlors, trustees, and third parties) are likely to change from a dense network to a sparser network, decreasing the level of social capital, which enhances people’s unwillingness to transfer the ownership of property; (3) It is reasonable for the Chinese legislators not to make clear the location of ownership to trust property, instead, they leave it to market solution and accumulation of cases.

References Adelman S, Foste K (1992) Critical legal theory: the power of law. In: Grigg-Spall I, Ireland P (eds) Critical lawyer’s handbook. Pluto Press, London, pp 39–43 Adler PS, Kwon S-W (2013) Social capital: prospects for a new concept. In: Costa AC, Anderson N (eds) Social capital: conceptual issues and levels of analysis. Trust and social capital in organizations, vol 3. Sage, London Ai J (2006) Guanxi networks in China: its importance and future trends. China World Econ 14 (5):105–118 Azami NA, The sociological approach to law as compared with the traditional conception of law. http://www.agc.gov.my/pdf/publications/sociological_approach.pdf. Accessed 18 Jan 2015 Becker GS (1993) Human capital: a theoretical and empirical analysis, with special reference to education, 3rd edn. University of Chicago Press, Chicago Bourdieu P (1986) The forms of capital. In: Richardson J (ed) Handbook of theory and research for the sociology of education. Greenwood, Westport, p 241 Bourdieu P (1989) Social space and symbolic power. Sociol Theory 7(1):14–25 Bourdieu P, Passeron J-C (1990) Reproduction in education, society and culture (trans: Richard Nice R). Sage, Thousand Oaks Bourdieu P, Wacquant LJD (1992) An invitation to reflexive sciology. University of Chicago Press, Chicago Castiglione D et al (eds) (2008) The oxford handbook of social capital. OUP, New York Chen M-J (2003) Inside Chinese business: a guide for managers worldwide. Harvard Business Review Press, Bringhton

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Cheng L-W (ed) (2012) Handbook of contemporary marketing in China: theories and practices. Nova Science Publishers, Hauppauge Coleman J (1984) Education in the post-brown era. In: Brown v. Board of education of Topeka: an assessment thirty years later. A series of lectures and discussions (Institute, West Virginia, February 10–11 and April 11–13, 1984) Coleman J (1988) Social capital in the creation of human capital. AJS 94(Supplement):95–120 Coleman J (1994) Foundations of social theory. Belknap Press, Cambridge de Nooy W, Mrvar A, Batagelj V (2005) Exploratory social network analysis with Pajek. CUP, Cambridge Easley D, Kleinberg J (2010) Networks, crowds, and markets: reasoning about a highly connected world. CUP, Cambridge Ehrlich E (1936) Fundamental principles of the sociology of law (trans: Walter LM). Harvard University Press, Cambridge Erickson BH (2001) Good networks and jobs: the value of social capital to employers and employees. In: Lin N, Cook KS, Burt RS (eds) Social capital: theory and research. Aldine de Gruyter, New York, pp 127–143 Field J (2009) Social capital, 2nd edn. Routledge, New York Foley MW, Edwards B (1999) Is it time to disinvest in Social Capital? J Public Policy 19(2):141– 173 Fukuyama F (1995) Trust: the social virtues and the creation of prosperity. Free Press, New York City Gauntlett D (2011) Three approaches to social capital. http://www.makingisconnecting.org/ gauntlett2011-extract-sc.pdf. Accessed 18 Jan 2015 Granovetter M (1985) Economic action and social structure: the problem of embeddedness. 91. Am J Sociol 91(3):481–510 Hsung RM, Lin N, Breiger RL (eds) (2009) Contexts of social capital: social networks in markets, communities, and famililies. Routledge, New York Hwang K-K (1987) Face and favor: the Chinese power game. Am J Sociol 92(4):944–974 Jackman RW, Miller RA (1998) Social capital and politics. Annu Rev Polit Sci 1:47–73 Knack S, Keefer P (1997) Does social capital have an economic payoff? a cross-country investigation. Q J Econ 112(4):1251–1288 Kramer RM, Tyler TR (eds) (1996) Trust in organizations: frontiers of theory and research. Sage, London Lin N (2001) Social capital: a theory of social structure and action. CUP, Cambridge Lin N, Cook KS, Burt RS (eds) (2001) Social capital: theory and research. Aldine de Gruyter, New York Lin N, Fu Y-C, Chen CJ (eds) (2014) Social capital and its institutional contingency: a study of the United States, China and Taiwan. Routledge, London Luhmann N (1979) Trust and power. Wiley, Hoboken Luhmann N (2000) Familiarity, confidence, trust: problems and alternatives. In: Diego G (ed) Trust: making and breaking cooperative relations. Basil Blackwell, Oxford, pp 94–107 Luo J-D, Yeh Y-C (2009) The transaction cost: embeddedness approach to studying Chinese outsourcing. In: Hsung R et al (eds) Contexts of social capital social: networks in markets, communities and families. Routledge, London, pp 115–138 Lyon F et al (2006) Introduction: the variety of methods for the multi-faceted phenomenon of trust. In: Lyon F et al (eds) Handbook of research methods on trust. Edward Elgar Publishing, Cheltenham, pp 1–15 Mankiw NG (2008) Principles of economics, 5th edn. Cengage Learning, Boston Matsuda M, Yamagishi T (2001) Trust and cooperation: an experimental study of PD with choice of dependence. Jpn J Psychol 72(5):413–421 Nathan AJ (1993) Is Chinese culture distinctive? a review article. J Asian Stud 52(4):923–936 Potter PB (2002) Guanxi and the PRC legal system: from contradiction to complementarity. In: Gold T et al (eds) Social connections in China. CUP, Cambridge, pp 179–195 Prell C (2012) Social network analysis: history, theory and methodology. Sage, London

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Putnam RD (1993a) The prosperous community: social capital and public life. 13. Am Prospect 13:35–42 Putnam RD (1993b) What makes democracy work? Natl Civic Rev 82(2):101–107 Putnam RD (1996a) The decline of civil society: how come? so what? The John L. Manion Lecture. Canadian Centre for Management Development, Ottawa Putnam RD (1996b) The strange disappearance of civic America. Policy-St Leonards 12:3–15 Putnam RD (2000) Bowling alone: the collapse and revival of American community. Simon & Schuster, New York City Risto S, Kirsimarja B, Sanna S (2007) Measuring inter-organizational trust—a critical review of the empirical research in 1990–2003. Ind Mark Manag 36(2):249–265 Schultz TW (1961) Investment in human capital. AER 151(1):1–17 Shapiro DL, Sheppard BH, Cheraskin L (1992) Business on a handshake. Negot J 8(4):365–377 Stiglitz JE (2000) Formal and informal institutions. In: Dasgupta P, Serageldin I (eds) Social capital: a multifaceted perspective. World Bank, Washington DC, p 59 Swedberg R (1996) Analyzing the economy: on the contribution of James S. Coleman. In: Clark J (ed) James S. Coleman. The Falmer Press, pp 313–328 Teramoto S, Jurčys P (2013) Intermediaries, trust and efficiency of communication: a social network perspective. In: Fenwick M, van Uytsel S, Wrbka S (eds) Networked governance,transnational business and the law. Springer, Berlin, pp 99–126 Tzanakis M (2013) Social capital in Bourdieu’s, Coleman’s and Putnam’s theory: empirical evidence and emergent measurement issues, http://wh.agh.edu.pl/other/materialy/672_2014_ 04_23_13_04_24_Spcial_capital2.pdf. Accessed 15 Jan 2015 Uslaner EM (2002) The moral foundations of trust. CUP, Cambridge Walker G, Kogut B, Shan W (2013) Social capital, structural holes and the formation of an industry network. In: Costa AC, Anderson N (eds) Social capital: organizational advantage and inter-organizational networks. Trust and social capital in organizations, vol 4. Sage, London, pp 173–200 Welter F, Alex N (2012) Research trust in different cultures. In: Lyon Fergus et al (eds) Handbook of research methods on trust. Edward Elgar, Cheltenham, pp 50–60 Williamson OE (1996) The mechanisms of governance. OUP, New York Zak PJ, Knack S (2001) Trust and growth. Econ J 111(470):295–321 Zucker LG (1986) Production of trust: institutional sources of economic structure 1840–1920. Res Organ Behav 8:53–111

Chapter 5

An Empirical Study on China Trust Industry: Methods

Abstract This chapter is a description and explanation of the methods how the empirical study was conducted in this research. The analysis presented in this book draws on empirical material from two main sources: documents and face-to-face interviews. In this research, data about the development of trust business is collected from written documents, while the data for the relationship between financial institutions and citizens is gathered from qualitative research (namely, face-to-face interviews). Following a brief introduction of empirical research questions and empirical research methods, this Chapter spends one section to explain the ways in which the data of trust business in China is collected, and spends another section to explain the method to collect data on mutual trust between potential investors and financial institutions in China. This Chapter ends with several important selected results of this empirical research, and an explanation on the limitations of this empirical research.

Empirical Research is based on information gained by experience, observation, or experiment. It normally starts with some a priori theory, which the researcher develops to try to explain and/or predict what happens in the real world. By conducting empirical research, researchers can go beyond simply reporting observations, and promote environment for improved understanding. At the same time, empirical study allows to combine extensive research with detailed case study, and to prove relevancy of theory by working in a real world context.1 Researchers usually use the advantage of empirical research in understanding and responding more appropriately to dynamics of situations. In case of this research, the factual data of trust business development in China are rarely included in the legal research on the location of ownership of trust assets in China. Meanwhile, the social conditions surrounding the Chinese trust business have not been taken into consideration when legal scholars discuss the issue of trust 1 See Alasuutari et al. (2008). See also Empirical Research, available at https://explorable.com/ empirical-research. Accessed 10 February 2015; Empirical Research Methods, available at http:// www.itu.dk/*oladjones/semester%203/advanced%20it%20mgt%20and%20software%20enginee ring/project/materials/what.%20is%20empirical%20research1.pdf. Accessed 10 February 2015.

© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2_5

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property ownership in China. However, both of these practical and empirical factors are relevant to the understanding of the trust law in China. The hypotheses proposed in Chap. 4 need to be tested or refined with empirical evidences. To this aim, we conducted an empirical study on China’s trust industry, focusing on the development of trust business and the changing relationship between the financial service providers and the investors and/or ordinary citizens.

5.1

Empirical Research Questions

Based on the hypotheses in Chap. 4, the author addressed the general questions of the empirical research in this chapter as follows: 1. How has the trust business in China developed since the enactment of Chinese trust law? 2. What has been facilitate the thriving of Chinese trust business in the recent past? 3. What role does guanxi play in the establishment of trust transaction in China? 4. What is the development trend of the consumer group of trust business in China? 5. To what extent do the potential investors trust the trustees (trust companies) and other financial service providers in China?

5.2

Empirical Research Methods

Empirical research methods are a class of research methods in which empirical observations or data are collected in order to answer particular research questions. Empirical research methods are often divided into two main categories: quantitative research methods and qualitative research methods. Quantitative research is the research method “explaining phenomena by collecting numerical data (data in the form of numbers) that are analysed using mathematically based methods (in particular statistics).”2 The objective of quantitative research is to develop and employ mathematical models, theories and/or hypotheses pertaining to phenomena. The process of measurement is central to quantitative research because it provides the fundamental connection between empirical observation and mathematical expression of quantitative relationships. To get reliable statistical results, it’s important to survey people in fairly large numbers and to make sure they are a representative sample of the target field. Qualitative researchers aim to gather an in-depth understanding of human behavior and the reasons that govern such behavior. Qualitative research methods

2

See Aliaga and Gunderson (2005), Muijs (2011).

5.2 Empirical Research Methods

105

are used to collect qualitative data (data in the form of text, images, sounds) drawn from observations, interviews and documentary evidence.3 The qualitative method investigates the why and how of decision making, not just what, where, when.4 Qualitative research is especially effective in obtaining culturally specific information about the values, opinions, behaviors, and social contexts of particular populations.5 It seeks to understand a given research problem or topic from the perspectives of the local population it involves. Hence, smaller but focused samples are more often used than large samples. Qualitative methods tend to be more appropriate in the early stages of research (exploratory research) and for theory building. Quantitative methods tend to be more appropriate when theory is well developed, and for purposes of theory testing and refinement. In the conventional view, qualitative methods produce information only on the particular cases studied, and any more general conclusions are only hypotheses. Quantitative methods can be used to verify which of such hypotheses are true. A number of good social studies either take place after an initial phase of qualitative research, or are done in tandem with the gathering of qualitative data. The qualitative research informs and helps shape the quantitative work that will follow. Qualitative work can be a useful compliment and helpful precedent to designing a quantitative study.6 However, as some scholars state, quantitative research is not truly meaningful without a qualitative component. Qualitative research collects and analyzes lived experience from the ground up and on the terms set by the people and organizations being studied, thereby providing an inroad into the understanding of lived experience and situational complexities that other kinds of analysis (theoretical and quantitative) cannot. Qualitative researches complement, enrich, and challenge the conclusions of quantitative research.7 In practice, no research method is entirely qualitative or quantitative.8 For example, a survey may collect qualitative data using open ended questions as well as quantitative data using closed questions; an experiment may include observations of participant behavior as well as measures of response time and accuracy; a case study may incorporate quantitative data (e.g. system usage statistics) as well as qualitative data (e.g. interviews with users).9

3

See Alasuutari et al. (2008). Silverman (2013). See also Given (2008), Berg (2001). 5 Qualitative Research Methods: A Data Collector’s Field Guide, available at http://www.ccs.neu. edu/course/is4800sp12/resources/qualmethods.pdf. Accessed 20 February 2015. 6 Prell (2012), p. 68. 7 Silbey (2015), p.17. 8 Yin (1994). 9 Empirical Research Methods. http://www.itu.dk/*oladjones/semester%203/advanced%20it%20mgt %20and%20software%20engineering/project/materials/what.%20is%20empirical%20research1.pdf. Accessed 20 February 2015. 4

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Regarding the specific techniques for gathering data in social science, typically the followings are most often used. The first technique is to gather data from written documents, archival materials, electronic sources, the Internet, and so on and so forth. By employing this technique, the analyst can select to attain information from trustworthy sources, which are assumingly plenty. The second technique is to make an observation. This technique relies on the analyst’s own observations of the interactions among the actors. The third technique is to distribute questionnaires or to conduct interviews. Through this technique, the analyst relies on memory of the respondents. The questions in the questionnaires or interview have to be clear and precise enough to attain the kind of information the analyst hopes to gather.10 In this research, we divide the data collection into two parts. On the one hand, in order to explain the current situation of Chinese trust business, the quantitative aspects of the development of Chinese trust business need to be analyzed. Since official statistics regarding Chinese trust industry is plenty, we use the relevant statistical data primarily from the written documents, archival materials, and electronic sources, available on governmental websites, professional reports etc. On the other hand, in order to collect data to explain the degree of (mutual) trust between actors (settlor, trustee, and beneficiary), qualitative methods are suitable, because, with the ever changing society, this kind of new specific data are not available in existing studies, and a large number of respondents is not viable in this research. It does not to say that the quantitative research should not follow, but it is beyond the limited space in this book. In addition, qualitative methods have advantages in the study from the perspective of social capital. As Coleman put it, “whether social capital will come to be as useful a quantitative concept in social science as are the concepts of financial capital, physical capital, and human capital remains to be seen; its current value lies primarily in its usefulness for qualitative analyses of social systems and for those quantitative analyses that employ qualitative indicators.”11 The three most common qualitative methods are participant observation, in-depth interviews, and focus groups. Each method is particularly suited for obtaining a specific type of data. Participant observation is appropriate for collecting data on naturally occurring behaviors in their usual contexts. In-depth interviews are optimal for collecting data on individuals’ personal histories, perspectives, and experiences, particularly when sensitive topics are being explored. Focus groups are effective in eliciting data on the cultural norms of a group and in generating broad overviews of issues of concern to the cultural groups or subgroups represented.12 For the qualitative aspects of our research, we adopt the method of in-depth interviews for the purpose of data gathering. The reasons are twofold. First of all, the aim of our qualitative research is to investigate individual’s personal attitude or

10

Prell (2012), pp. 68–74. Coleman (1994), pp. 305–306. 12 Given (2008). 11

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107

evaluations towards the financial institutions, for which the method of the in-depth interview is appropriate. Secondly, since our subject and issue are about people’s personal or family property or assets, which are in the nature of something controversial and sensitive, the method of the in-depth interview is optimal. In-depth interviews have other advantages, for example, they are relatively flexible on, for example, the addition, exclusion, or wording of particular interview questions. Participant responses affect how researchers ask questions and what questions researchers will ask in the next interview, that is, data collection and research questions can be adjusted according to what is learned in previous interviews.13 Through the method of interviews the study gains flexibility and reliability: interviewees often take studies more seriously when answering questions put to them by a human being, and interviewers may be given some latitude to probe interviewees when they are unclear, unresponsive, or confused.14

5.3

Source of Empirical Material—I: Documents

This source includes a wide range of materials from government or ‘official’ documents (such as China Trust Association) to working papers (such as Annual report of trust industry) and journal papers. The quantitative data associated with the development of China’s trust industry can be found specifically in these documents. The main types of the relevant documents we used in this research are as follows.

5.3.1

Data from China Trust Association

China Trustee Association (CTA) was established in May 2005. It is a selfregulatory organization and non-profit social organization with the status of a legal person approved by China Banking Regulatory Commission (CBRC) and registered with the Ministry of Civil Affairs of People’s Republic of China (Ministry of Civil Affairs). CTA operates under the guidance and supervision of CBRC and Ministry of Civil Affairs that in charge of the registration of social groups. The aim of China Trustee Association is to facilitate its members15 to realize the common interests. It is committed to fulfilling the functions of self-discipline, rights protection, coordination and provision of services, serving as a bridge and bond between regulatory authorities and trust companies, protecting the lawful rights and

13

Given (2008). Newman (2011), pp. 39–40. 15 Its members include 68 trust companies, a law firm, and an accounting firm. For the names of its members, see http://www.xtxh.net/xtxh/ctamember/index.htm. Accessed 21 February 2015. 14

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interests of the trust sector, maintaining the order of the trust market, improving the overall quality and competence of the practitioners, enhancing the delivery of services to its members, and promoting the sound development of the trust sector.16 China Trustee Association releases data about Chinese trust industry at the end of every quarter of the year since 2010. Also, the research reports and analysis on trust business are included. We use the data and documents from its website: http:// www.xtxh.net/xtxh/.17

5.3.2

Reports on China’s Trust Industry

The Report on the Development of China’s Trust Sector 2013–2014 was released in Beijing on 8th July, 2014. It is the first report that China Trustee Association initiated and organized to compile for the whole sector. It’s expected to be a regular report in the future. Trust and Fund Research Institution affiliated to Renmin University of China (中国人民大学信托与基金研究所), has been publishing an annual report on the development of China’s trust industry since 2004.18 The data and analysis in the reports is of great value for both academia and practice. Also, there are reports and surveys on China’s trust industry conducted by trust companies or law firms, accounting companies. KPMG in China19 is among the most professional institutions which are doing research on the development of financial sectors in China. KPMG released 3 reports on China’s trust sector so far.20 Pingan Trust21 and Mckinsey & Company (Greater China)22 also released a report on China trust industry 2013.23

16

See http://www.xtxh.net/xtxh/ctamember/index.htm. Accessed 21 February 2015. The URL of its website in English is http://www.xtxh.net/xtxh/english.jhtml. 18 The first publication of this series is on 1997–2003. Since 2004, the report is released once a year. Each report was published by China Economic Publishing House. 19 KPMG is one of the largest professional services companies in the world and one of the Big Four auditors, along with Deloitte, EY and PwC. 20 KPMG (2010), KPMG (2011), KPMG (2012). 21 PingAn Trust (PingAn Trust Co. Ltd.) was established on 9 April 1996 and is a subsidiary and integral part of PingAn Insurance (Group) Company of China Ltd. It has the biggest Registered capital among trust companies in China. 22 McKinsey & Company is the leading global management consulting firm in Greater China. It is the advisor to the region’s leading businesses, governments, and institutions. Its primary mission is to help its clients achieve substantial and enduring impact by tackling their biggest issues concerning strategy, operations, organization, technology and finance. 23 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 17

5.4 Source of Empirical Material—II: Targeted In-Depth Interview

5.4 5.4.1

109

Source of Empirical Material—II: Targeted In-Depth Interview Research Design

In order to get the first-hand resource, we adopted the method of face-to-face interviews. Efforts were made to achieve the aim of the in-depth interviews to answer the questions about the (mutual) trust between potential investors and financial institutions in China. The interview questions were designed for two groups of interviewees (as attached in “Appendix A”). For the potential investors of financial products, we expected that they can offer the information about their attitude towards financial institutions. For the professionals who are practicing in the industry, our expectation was to get the information in how they deal with their clients. The questions listed in Appendix A are typical examples thereof. For each interviewee, the questions were adjusted while the interview was proceeding. This flexibility is one of the advantages of face-to-face interviews, and it is more likely for us to get what we need most. In case that supplement information would be needed, follow-up interviews through email or phone were also designed. This intention was to be indicated to the interviewees during the interviews.

5.4.2

The Sampling

While much attention is given to probability sampling in quantitative research, qualitative research often uses smaller non-probability samples with longer more detailed interviews. The number of interviews is therefore often shaped by resource constraints and issues of access rather than statistical requirements.24 In qualitative research, only a subset sample of a population is selected for any given study. The study’s research objectives and the characteristics of the study population (such as size and diversity) determine which and how many people to select. Three of the most common sampling methods used in qualitative research are: purposive sampling, quota sampling, and snowball sampling.25 Purposive sampling, one of the most common sampling strategies, group participants according to preselected criteria relevant to a particular research question. Sample sizes, which may or may not be fixed prior to data collection, depend on the resources and time available, as well as the study’s objectives. Purposive sample sizes are often determined on the basis of theoretical saturation (the point in data 24

Lyon (2006), p. 86. Qualitative Research Methods: A Data Collector’s Field Guide, available at http://www.ccs.neu. edu/course/is4800sp12/resources/qualmethods.pdf. Accessed 20 February 2015.

25

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collection when new data no longer bring additional insights to the research questions). Purposive sampling is therefore most successful when data review and analysis are done in conjunction with data collection.26 Quota sampling, sometimes considered a type of purposive sampling, is also common. In quota sampling, we decide while designing the study how many people with which characteristics to include as participants. Snowballing—also known as chain referral sampling—is considered a type of purposive sampling. In this method, participants or informants with whom contact has already been made use their social networks to refer the researcher to other people who could potentially overview participate in or contribute to the study. Snowball sampling is often used to find and recruit “hidden populations,” that is, groups not easily accessible to researchers through other sampling strategies.27 In this research, we adopted the purposive sampling. Qualitative in-depth trust research requires a closer relationship between the researcher and the respondents.28 While the access to the interviewees is challenging due to the sensitive nature of trust research, many studies rely on personal connections where there is already trust between researcher and the interviewees and a greater understanding of how the data may be used.29 We conducted the face-to-face interviews in the first place, and contact with them through telephone or email for the follow-up questions. The interviewees are Chinese middle-class30 in Beijing (北京) and Zhengzhou (郑州) (see Fig. 5.1). The standard of selecting interviewees in this project is representativeness. Beijing is one of the few cities in China that play dominant role in trust industry market, therefore, the majority interviewees are residents of Beijing. Zhengzhou is the capital city of Henan (河南) province which ranks No.5 in China in terms of GDP as of 2014. Zhengzhou was selected because the author as the interviewer is very familiar with its culture and language,31 and also has direct connection with the middle-class interviewees, which may increase the degree of representativeness of the interviewees. This field work was conducted from February 18, 2014 to March 8, 2014, with 5 interviewees in Beijing and 2 interviewees in Zhengzhou visited (see the sample

26

Qualitative Research Methods: A Data Collector’s Field Guide, available at http://www.ccs. neu.edu/course/is4800sp12/resources/qualmethods.pdf. Accessed 20 February 2015. 27 Qualitative Research Methods: A Data Collector’s Field Guide, available at http://www.ccs. neu.edu/course/is4800sp12/resources/qualmethods.pdf. Accessed 20 February 2015. 28 Lyon (2006), p. 87. 29 Lyon (2006), p. 87. 30 In this book, middle class is defined as people with wealth above USD 1 million (approximately CNY 6 million). 31 Chinese consists of hundreds of local language varieties. These varieties have been classified into seven to ten groups, the largest being Mandarin (e.g. Beijing dialect), Wu (e.g. Shanghainese), Min (e.g. Taiwanese Hokkien), and Yue (e.g. Cantonese). Inter local language communication is not always easy and convenient in China. See https://en.wikipedia.org/wiki/Varieties_of_Chinese Accessed 30 July 2015.

5.4 Source of Empirical Material—II: Targeted In-Depth Interview

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Fig. 5.1 Location of the interviews

questions of the interviews in “Appendix A”, and the list of interviewees in “Appendix B”). The language used in the interviews is Chinese. Some questions and answers in the interview are attached in “Appendix C” of this book. The average length of the interviews was almost an hour and a half.

5.5

Selected Results of the Empirical Research

The information acquired by aural and written interviews and documents in the empirical research outlined above can provide some insights into the understanding of China’s trust business and its environments. The following several selected points are helpful to the analysis in the later chapters in this book.

5.5.1

Chinese New Middle-Class Citizens Show Great Willingness to Invest into Real Estate Market

With China’s economic boom, the real estate market has developed at a fantastic speed within just a few years. From 2005, the property price increased in most big

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and medium-sized cities in China. In some areas, prices even doubled within half a year.32 In the interviews of this research, when interviewees were asked to tell the types and size of their respective assets, their answers indicated that investment in the real estate market is the most profitable investment target in China. For example, one interviewee answered that: Actually, I have very few types of assets, namely, cash, apartments, cars, stocks, and gold. Cash and apartments constitute a major portion of my total assets. I bought two apartments in Beijing and one in my hometown, the price of which in total is approximately CNY 12 million (around USD 2 million). Several years ago, I invested in stocks, funds and gold, but now I sold most of them after great losses in each market. The reason why I bought apartments is that the price of real estate increases dramatically in recent years and there is a prospect that the price will continue to go up in the near future. In big cities like Beijing, the best way to invest is to buy houses or apartments. I am not interested in how to make money by managing my apartments, instead, to own an apartment itself is to make money. In addition, possessing and controlling the house by myself makes me feel more comfortable than entrusting anybody else or any agency. (See Appendix C—Question 1: Answer 1.)

Similarly, two other participants stated that: Most of my cash was invested into real estate, such as apartments and commercial buildings. Nowadays, I estimate that, for Chinese citizens, more than 50 percent of their investment goes to real estate market. (See Appendix C—Question 1: Answer 2.) We spent a lot in buying cars and apartments. The price of apartments is increasing rapidly in recent years in China. Most of the cash in my family is invested into higher return financial products rather than being deposited in banks. (See Appendix C—Question 1: Answer 3.)

5.5.2

High Net Worth Individuals in China Are Frustrated to Utilize Domestic Wealth Management Service Providers

There are emerging needs of private wealth service among high net worth individuals (HNWIs)33 and ultra-HNWIs34 in China, because they face a dilemma in how to preserve wealth and leave it to their families.35 People are relatively controversial to put their assets under the control of any domestic wealth management 32

For instance, in Shenzhen (a major city in the south of Southern China’s Guangdong Province, also China’s first Special Economic Zone), property price increased more than 50% in the first half of 2007. 33 Chinese high net worth individuals (HNWIs) is defined as individuals with at least 10 million RMB (approximately $1.6 million) in investable assets, according to the China Private Wealth 2013 report jointly published by China Merchants Bank (CMB) and Bain & Company. 34 Chinese ultra-HNWIs is defined as individuals with at least 100 million RMB in investable assets, according to the China Private Wealth 2013 report jointly published by China Merchants Bank (CMB) and Bain & Company. 35 More details about the emerging HNWIs in China will be discussed in chapter 7 of this book.

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agency. They are increasingly seeking overseas asset allocation for risk diversification and investment opportunities. In China, the wealth management services are mainly provided by commercial banks, trust companies, securities houses, insurance companies and other institutions (for example, fund management subsidiaries, or third-party wealth management advisers). But their private wealth products are not sophisticated to effectively respond to the emerging needs of HNWIs. When asked “which type of services are you utilizing for assets management?” an interviewee provided a very straightforward answer that: The domestic channel of investment in China is relatively narrow. I am always looking for financial products with higher return because of the increasing inflation and decreasing rate of bank deposit.36 In foreign countries, the multiple and diverse channels for investment make wealth and investment management consulting necessary for ordinary citizens. People in China don’t have many options to invest. The most invested markets in China are real estate, stocks, gold, and foreign exchange market. (See Appendix C—Question 2: Answer 1.)

Regarding the financial products in China, two participants of the interview commented that: First of all, stock market is not a proper field to invest for ordinary people. It is very difficult to predict the stock market’s trend. Several years ago, stock market was appealing to ordinary citizens because of the dramatic rise of stock indexes. But in recent years, like many of my friends who invest in stocks, I lost quite a large sum of money in stock market. Secondly, bonds are considered to be of low risk, but sometimes the return cannot be assured. And the lack of liquidity makes bonds less attractive to me. Thirdly, the return rate of wealth management products in banks is relatively low. (See Appendix C—Question 2: Answer 2.) I prefer short-term financial products, because I don’t have confidence to put my money for a long period of time in any financial institutions for investment. Most asset management firms in China are not able to provide professional management consulting service. It would be problematic if the manager defaults or the assets are claimed by the manager’s creditors. In reality, default of the financial institutions does happen from time to time. In terms of apartments, I definitely want to control it by myself, because I do not want to lose my most valuable assets. (See Appendix C—Question 2: Answer 3.)

5.5.3

High Degree of Mutual Trust Between Clients and Commercial Banks in China37

Compared to other financial institutions, commercial banks in China have advantages of large number of branches and sophisticated customer network. To be able

36

Recently, the straightforward savings accounts produce no more than 0.35% a year and a 1-year fixed deposit earns at most 3.3% in China. 37 The “big four” state-owned commercial banks in China are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China.

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to access the growing number of wealthy individuals in China, a lot of Chinese banks have as a first step set up wealth management units which are independent of the rest of the bank. Some of the bigger players have come from nowhere over the last couple of years to build a good customer base of private banking clients by improving their product suite and relationship managers capabilities. One interviewee from the bank stated that: The main players in China’s wealth management industry are still the commercial banks, given their networks and therefore advantage in acquiring customers. I expect the banks to continue to be dominant, especially as they enhance their capabilities, product range and offshore platforms, such as platforms in Hong Kong. (See Appendix C—Question 3: Answer 1.)

At the same time, although many private individuals in China know they can get higher returns from other investment channels, they realize that these are riskier and that they can use the banks as a safer and more stable option. As one participant in our interview said: I am not an aggressive investor, I prefer to buy products with lower risk. I used to buy stocks, funds, government bonds, insurance, and gold, but now I only invest money in wealth management products in banks. Usually I choose to buy short-term products (e.g. 2 months, 3 months, 6 months) with medium interest rate (i.e. 5–7%). The only financial institutions in China you can trust are banks. Banks could somehow find ways to make sure that the investors get the return of their investment, preventing the reputation of banks from damaged. (See Appendix C—Question 3: Answer 2.)

5.5.4

Role of Guanxi in Chinese Trust Business

Trust companies in China have a shortage of client resources. Usually, they rely on commercial banks’ networks to find customers. Commercial banks become the agency of trust companies, selling trust products to their own high net worth customers. Additionally, managers in trust companies are required by the companies to make use of their connections to high net worth individuals for the sale of the private wealth management services or trust products. Relationship marketing is very common in modern companies all over the world, but in China, guanxi is a practical factor that cannot be missing when talking about relationship marketing activities of business. The HNWIs are also closely connected with each other. Their experience of trust products is spread among their circle. For the managers of trust company, being connected with some of HNWIs means that they have already had access to the network of HNWIs. This is evidenced by the information provided by one interviewee: The Chinese regulatory authority does not allow the financial institutions to propagandize their trust products to ordinary citizens, because trust products are of high risk, citizens are not encouraged to take the risk in blind. Managers of trust companies or wealth

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management department of banks are required to have connection with upper-class citizens. On the other hand, institutional investors accounted for larger portion of the overall trust products investors than individual investors. Institutions which need financing through trust projects always make use of their managers’ connections to access to the trust company. (See Appendix C—Question 4.)

5.5.5

Lack/Low Level of Trust of New Middle-Class Towards Trustees

Another relative newcomer in the wealth space has been the trust companies. They have moved from be a supplier of products to the banks to now also competing in this space directly by setting up their own wealth management units. Since trust companies are at the very beginning stage of doing the private wealth management services, they lack the skilled product designer and the active management capability and investment ability. This led to a low level of trust of new middle-class towards trust companies. Two interviewees indicated this kind of attitude towards trust companies: Although the return of trust products is higher, I am still hesitated to invest into them. The high interest rate means that trust products are with high risk. The average interest rate of trust products is above 10%, even up to 15%. Additionally, the lowest amount of investment in trusts is CNY 1 million, which indicates trusts market is a game among wealthy people who can take high risks. (See Appendix C—Question 5: Answer 1.) My wife works in a security company, so we have a certain degree of knowledge about investment. We rarely invest into trust products, because trust products have many disadvantages, for example, lack of information transparency, inflexible in transferring beneficiary’s rights. But this time the reason why we invested into trust products is that this trust product is issued by my wife’s security company. After our assessment of this product, we believe that the risk is not very high. (See Appendix C—Question 5: Answer 2.)

5.5.6

The Nascent Transition of Chinese Trust Business

Chinese trust business has been undergoing a rapid increase since 2007, according to the information from the source of relevant documents in this empirical research. This phenomenon is very interesting under the circumstance of low degree of consumers’ trust and the ambiguous regulation of trust law. This point will be illustrated in detail in Chap. 6. Although China’s trust business is growing, the business model is unsustainable and needs to be changed, as suggested by the professionals in trust business. Chapter 7 of this book will make a detailed description of this transformation.

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5.6

5 An Empirical Study on China Trust Industry: Methods

Interim Conclusion and Limitations

This chapter described the main sources of empirical data: (a) statistical data from industrial reports, and (b) targeted in-depth interviews. As described in this chapter, the references of statistical data is mainly the data released by China Trustee Association, and reports issued by some big Chinese trust companies and professional consulting companies. Meanwhile, the interviews were conducted from Feb. 18, 2014 to March 8, 2014, with 5 interviewees in Beijing and 2 interviewees in Zhengzhou visited. The language used in the interviews is Chinese. The average length of the interviews was an hour and a half. Through the empirical research, this chapter outlined several selected findings: (1) Chinese new middle-class citizens show great willingness to invest into real estate market; (2) High net worth individuals in China are frustrated to utilize domestic wealth management service providers; (3) High degree of mutual trust between clients and commercial banks in China; (4) Role of guanxi in China’s trust business; (5) Lack/Low level of trust of new middle-class towards Trustees; (6) The trust business in China has been thriving since 2007; (7) Nascent transformation of China’s trust business model. These findings will contribute a lot to the analysis in this chapter and Chap. 6. In the empirical research, the researcher encountered a number of limitations that were beyond the control of the researcher. They are (1) limitations of research methodology; and (2) limitations of conducting research in China. For the limitations of research methodology, firstly, selection of middle class or upper middle class citizens as interviewees posed time constraints. These wealthy people are usually very busy, and they are always on business trips around the world. Therefore, making a schedule for face-to-face interviews with all of the participants within a fixed short period of time was extremely difficult. It cost a lot of time and energy to coordinate with the participants. Secondly, the number of interviews done by the researcher in this research is not sufficient to produce full and rich descriptions of the findings. The researcher planned to do 11 interviews at the stage of research design, however, as explained in the first point, due to the difficulties in coordination with the interviewees, it ends up with 7 interviews. But since qualitative research is not badly affected by the number of participants, the findings of the research are still valid. With respect to limitations of conducting research in China, data collection activities in this research were influenced by a strong disinclination of Mainland China people to reveal information about their wealth and property to outsiders. And for bankers and other professionals in financial institutions, it is a sensitive issue as far as their view of guanxi is concerned. While such limitations are acknowledged, they do not detract from the significance of the findings in this empirical research. Instead, they have provided platforms for future research.

References

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References Alasuutari P, Bickman L, Brannen J (eds) (2008) The SAGE handbook of social research methods. Sage, London Aliaga M, Gunderson B (2005) Interactive statistics, 3rd edn. Prentice Hall, Upper Saddle River Asian Development Bank Consultant’s Report (2014) The People’s Republic of China: knowledge work on shadow banking—trust funds and wealth management products. http://www.adb.org/ sites/default/files/project-document/80950/shadow-banking-trust-funds-and-wmps-prc.pdf. Accessed 6 May 2015 Berg BL (2001) Qualitative research methods for the social sciences. https://mthoyibi.files. wordpress.com/2011/05/qualitative-research-methods-for-the-social-sciences__bruce-l-berg2001.pdf. Accessed 11 Feb 2015 Coleman J (1994) Foundations of social theory. Belknap Press, Cambridge Given LM (2008) The Sage encyclopedia of qualitative research methods. Sage, London KPMG (2010) China’s trust sector: the next chapter. https://www.kpmg.com/CN/en/Issues AndInsights/ArticlesPublications/Documents/China-trust-sector-next-chapter-201002.pdf. Accessed 6 May 2015 KPMG (2011) Mainland China trust survey 2011: extending the reach of China’s financial sector. http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/ChinaTrust-Survey-201107-4.pdf. Accessed 6 May 2015 KPMG (2012) Mainland China trust survey 2012. http://www.kpmg.com/CN/en/IssuesAnd Insights/ArticlesPublications/Documents/China-Trust-Survey-2012-201207-v2.pdf. Accessed 6 May 2015 Lyon F (2006) Access and non-probability sampling in qualitative research on trust. In: Lyon F, Mollering G, Saunders MNK (eds) Handbook of research methods on trust. Edward Elgar Publishing, Cheltenham Muijs D (2011) Doing quantitative research in education with SPSS, 2nd edn. Sage, London Newman MEJ (2011) Networks: an introduction. OUP, Oxford Prell C (2012) Social network analysis: history, theory and methodology. Sage, London Qualitative research methods: a data collector’s field guide. http://www.ccs.neu.edu/course/ is4800sp12/resources/qualmethods.pdf. Accessed 20 Feb 2015 Silbey J (2015) The Eureka myth: creators, innovators, and everyday intellectual property. Stanford University Press, Palo Alto Silverman D (2013) Doing qualitative research: a practical handbook, 4th edn. Sage, London Tang W (2014) Analysis on the sustainable development of China trust industry. J Syst Manag Sci 4:1 The Economist (2014a) China: a question of trust. http://www.economist.com/news/special-report/ 21601622-or-not-case-may-be-question-trust. Accessed 20 May 2014 The Economist (2014b) Shadow banking in China: battling the darkness. http://www.economist. com/news/finance-and-economics/21601872-every-time-regulators-curb-one-form-non-banklending-another-begins. Accessed 17 June 2015 The Economists (2014c) Shadow banking in China: credit paroled. http://www.economist.com/ news/finance-and-economics/21595483-big-default-averted-credit-paroled. Accessed 13 June 2015 The Economist (2014d) The lure of shadow banking. http://www.economist.com/news/leaders/ 21601826-shadow-banks-helped-cause-financial-crisis-better-regulated-they-could-help-avertnext. Accessed 13 June 2015 Wildau G et al (2013) China pilot scheme aims to shatter assumption; investments are not guaranteed. http://www.reuters.com/article/2013/10/10/us-china-banks-debt-idUSBRE99915D 20131010. Accessed 20 April 2015 Yin RK (1994) Cases study research, design and methods, 2nd edn. Sage, London

Chapter 6

Current Trust Industry in China: A Dense Network

Abstract This Chapter analyzes the relevant empirical evidences, and justified the hypothesis addressed in Chap. 4. The first section of this chapter provides statistical evidences for the growth of Chinese trust industry, and also analyzes the business models that are currently taken by Chinese trust companies. Then, the functions of trusts in modern China, which also serve as the engine for the rapid growth of China’s trusts, are explained. Moreover, a social network perspective allows us to identify some other crucial factors for the development of China’s trust business. The current trust industry in China is deemed to base on a dense network, and the evidences are illustrated in this Chapter. Further, this Chapter employs the concepts of mutual trust and network effects to analyze the characteristic of this dense network. Mutual trust plays a substantial role in establishing a business contract between the service providers and consumers. A network effect is the effect that one user of a good or service has on the value of that product to other people. This Chapter suggests that these factors together contribute to the explanation of the booming of China’s trust business in spite of ambiguity of Chinese Trust Law on the location of ownership of trust property.

As discussed in Chap. 2, Chinese Trust Law is ambiguous regarding the location of the ownership of trust property, and the ownership rights are regarded very important by the Chinese people, therefore, for investors in China, there is a risk of losing the ownership of their assets with the establishment of a trust. However, as the findings of the empirical research in Chap. 5 show, Chinese trust business has expanded since 2007 in spite of this uncertainty of the Law. There might be many reasons for this phenomenon, including the economic advantages of the trust scheme, or the special functions provided by Chinese trust business. Moreover, a social network perspective allows us to identify some other crucial factors for the development of Chinese trust business. In Sect. 4.5 of this book, it is hypothesized that the actors in the network of Chinese current trust business are closely connected with one another directly or

© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2_6

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indirectly. And the empirical research in Chap. 4 provides evidences for this hypothesis. This chapter aims to analyze the relevant empirical evidences, and justify this hypothesis.

6.1

The Thriving Commercial Trust Business in China

China commercial trust industry has been thriving over the past decade. In a general sense, wealth management services provided by commercial banks, security companies, insurance companies and other financial institutions based on trust principles can be included into trust industry. But according to Chinese Trust Law, trust industry only refers to the trust business opened up by trust companies. In this Section, for the convenience of introduction of statistics on trust industry, the latter meaning of trust industry is taken. In 2007, total assets under management of Chinese trust industry was approximately CNY 600 billion.1 But by the end of 2014, the total assets managed by the 68 trust companies in China reached a record-high CNY 13.9 trillion from around CNY 2 trillion in 2010.2 This is also evidenced by the “China Trust Industry Report 2013” made by Ping’an Trust and Mckinsey & Company (Greater China). Figure 6.1 illustrates the change in gross assets under management of the selected financial sectors (bank, trust, insurance, securities, and mutual fund) in China. Since 2012, trust sector became second only to banking sector assets of more than CNY 100 trillion in Chinese financial industry. Figure 6.2 shows the quarterly development of the volume and the growth rate of trust assets in China from 2010 to 2014. Commercial trust products in China can be classified as single pecuniary trust, collective pecuniary trust, and non-cash property trust. Single trusts are “products that are sold to a single investor, with the trust product developed by the trust company in accordance with the client’s specifications.” A collective trust is “a standardized trust product developed by the trust company that is sold to multiple investors.” Non-cash property trusts, “which comprises only a small minority of total trust assets, involve the management of non-monetary assets.”3 As shown in Table 6.1, at the end of fourth quarter of 2014, trust assets in China consisting of

1

KPMG (2010) China’s trust sector: the next chapter. https://www.kpmg.com/CN/en/ IssuesAndInsights/ArticlesPublications/Documents/China-trust-sector-next-chapter-201002.pdf. Accessed 6 May 2015. 2 China Trustee Association, http://www.xtxh.net/Trust_Statistics/19124.html. Accessed 25 November 2014. 3 English and Zhu (2014).

6.1 The Thriving Commercial Trust Business in China

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Fig. 6.1 Gross Assets under Management (AuM) of Financial Sectors in China4. Notes (1) Bank gross AuM includes deposit and wealth management volume. (2) Insurance gross AuM is the total asset of insurance companies, including investable assets and other assets. (3) Securities gross AuM includes wealth management volume

collective pecuniary trusts accounted for 30.70%, while the percentage of single pecuniary trust was 62.58% and that of non-cash property trust was 6.72%. Chinese trust company activities affect many aspects of the Chinese economy. The trust products have been classified by industry, including Industrial & Commercial (covers investments in industrial and commercial enterprises), Infrastructure (investment in city infrastructure such as power plants), Real Estate, Securities Market, Financial Institutions and others.5 As to the target markets of pecuniary trusts, as shown in Table 6.2, the assets of which reached USD 2.1 trillion, industrial and commercial enterprises made up 24.03% of investments, about 21.24% of funds were invested in infrastructure, financial institutions accounted for 17.39%, investment in stocks and bonds made up 13%, and real estate accounted for about 10%.

4

[Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013, p. 16. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015] 5 English and Zhu (2014).

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Fig. 6.2 Chinese trust assets outstanding and rate of growth (Sekine 2015)

Table 6.1 Trust assets managed by Chinese trust companies in the fourth quarter of 2014

Trust assets (CNY 10907.111 billion) Divided by categories of trust Divided by trustee duty (%) property (%) Collective 30.70 Financing 33.65 pecuniary trust Single pecuniary 62.58 Investment 33.70 trust Non-cash property 6.72 Non-discretionary 32.65 trust China Trustee Association, http://www.xtxh.net/xtxh/statistics/ 22930.htm. Accessed 15 April 2015 Source China Trustee Association

6.2 The Functions of Trusts in China Today

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Table 6.2 Pecuniary trust assets managed by Chinese trust companies in the fourth quarter of 2014 Pecuniary trusts (CNY 13040.498 billion) Divided by forms of funds application

Divided by categories of target market

Loan 40.42% Infrastructure Short-term investment 12.71% Real estate Long-term bonds investment 21.56% Securities (stocks) Long-term equity investment 8.47% Securities (public offering funds) Leasing 0.05% Securities (bonds) Purchase-and-sellback 2.91% Financial institutions Due from banks 7.82% Industrial and commercial enterprises Others 60.5% Others China Trustee Association, http://www.xtxh.net/xtxh/statistics/22930.htm. Accessed 2015 Source China Trustee Association

6.2

21.24% 10.04% 4.23% 1.09% 8.86% 17.39% 24.03% 13.13% 15 April

The Functions of Trusts in China Today

In China it is a special financial license with which trust companies offer various financial services.6 The aim of China in using trusts is the encouragement and facilitation of foreign investment, but it also is seeking a widespread domestic involvement in the raising of capital for public and commercial development.7

6.2.1

Financing Tool for Cash-hungry Sectors

One important factor that facilitate the rapid growth of China’s trust industry in the past decade is that the Chinese banking and capital market systems is not able to provide sufficient financing for the cash-hungry sectors such as real estate and SMEs. Trusts perfectly fill this gap in the financial system by bridging the demand side and the supply side for the financial instrument in the market. The investment-led economic growth model in China caused a rising demand for financing.8 Many enterprises, especially small- and medium-sized enterprises, find

6

Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 7 Waters (2007). 8 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015.

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that it is very difficult and expensive to get loans. On the other hand, due to the inflation and a decreasing rate of bank deposit in China, people are more willingly to invest than to save in bank, seeking a higher return. But the increasing private capital could not get proper channels for investment. Under this background, trust companies in China can make use of their advantages of broad scope and flexible methods of investment. Trust companies can run business across the money market, the capital market and the industry market, while other financial institutions such as banks, security companies can only run business in a particular market. Trust companies can use almost all financial instruments, and provide packages of financial services for the real economy.9 Therefore, trust companies become channels for other financial institutions in China.10 Trust companies can raise large amounts of money from businesses and individuals by offering returns as high as 10%. They lend to firms that are unable to borrow from banks, and charge even higher interest to borrowers.11 However, its function as shadow banking contributes a lot to the problem of Chinese commercial trust business. The driver for this precipitous growth was the so-called bank-trust cooperation, enabled by the permission of China Banking Regulatory Commission (CBRC) of bank WMPs to fund trust plans in 2007. The growth of the trust industry remained strong as it was increasingly fueled by investment from non-bank financial institutions, cash-rich companies, and high net worth individuals.12

6.2.2

Effective Tool to Get High Return of Investment for Investors

In the high risk economy, banks are unable to satisfy the financing demand due to the tight regulations of the Chinese government. Thus, alternative lending players like the trust companies have the opportunity to grow in the market. Trust companies in China have effectively provided financing for lower-rating borrowers such as SMEs, while making huge property income for investors. As shown from the statistics, trust companies in China helped investors get trust incomes of CNY 55.2 billion, 67.8 billion and 117.8 billion in 2009, 2010 and 2011 respectively.13 9

English and Zhu (2014). Tang (2014). 11 The Economist (2014) China: a question of trust. http://www.economist.com/news/specialreport/21601622-or-not-case-may-be-question-trust. Accessed 20 May 2014. 12 Asian Development Bank Consultant’s Report (2014) The People’s Republic of China: knowledge work on shadow banking—trust funds and wealth management products. http://www. adb.org/sites/default/files/project-document/80950/shadow-banking-trust-funds-and-wmps-prc.pdf . Accessed 6 May 2015. 13 Tang (2014), p. 4. 10

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According to the analysis conducted by According to the sources from China Trustee Association, WIND,14 Bloomberg,15 and McKinsey, compared with other investment products, trust products helped the Chinese investors get the highest investment profits in the past few years. From 2010 to 2012, the average annual return of trust products was 8.8%, while that of the stock index, fixed income fund, money market fund and five-year time deposit was −11, 5.7, 3.3 and 4.7% respectively.16 High rate of return always comes along with high risk, but in China, the risk of trust products is greatly decreased due to the phenomenon of “absolute payment” (or “implicit principal guarantee”) which refers to “the situation in which a trust product matures and the trust company is in the position to pay out the full value of the expected return.”17 Therefore, it is common practice in China that investors of trust product are paid the principal investment, and sometimes the full expected return, even if the trust product has underperformed.18 This practice is, to some extent, incentivized by a regulation19 issued by the CBRC in 2004. This regulation stipulates that “if a trust company is responsible for incurring principal losses on two consecutive assembled trust plans, the CBRC shall suspend its qualification for conducting trust business of assembled funds for 2 years.”20 In addition, as a matter of fact, commercial banks constitute almost all of the institutional investors in trust products. State-owned banks are the most important funding source for trust assets. In order to prevent the credit market from seizing up, these big banks could finally intervene to buy up troubled trust products.21 However, the model of “absolute payment” is not sustainable in a long run. The instance of trust default (e.g. “Credit Equals Gold No.1” issued by CCT) has occurred since 2014.

14

WIND, Wind Information Co., Ltd, headquartered in the Lujiazui Financial Center in Shanghai, is a leading integrated service provider of financial data, information, and software. 15 Bloomberg L.P. is a privately held financial software, data and media company headquartered in New York City. 16 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013, p. 17. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. The return of trust products is expected return, because actual realized return of all trust products is difficult to observe as payout information is not publicly disclosed. 17 Hsu (2016), p. 189. 18 Hsu (2016), p. 189. 19 Notice of China Banking Regulatory Commission Concerning Relevant Issues on Further Regulating Trust Business of Assembled Funds (中国银行业监督管理委员会关于进一步规范 集合资金信托业务有关问题) (2004), http://www.cbrc.gov.cn/chinese/home/docDOC_ ReadView/1077.html. Accessed 19 May 2017. 20 Hsu (2016), p. 189. Notice of China Banking Regulatory Commission Concerning Relevant Issues on Further Regulating Trust Business of Assembled Funds (2004), para. 20. 21 The Economist (2014) China: a question of trust. http://www.economist.com/news/specialreport/21601622-or-not-case-may-be-question-trust. Accessed 20 May 2014.

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6 Current Trust Industry in China: A Dense Network

Dense Network as a Possible Facilitator of the Growth of Chinese Trust Industry

Trust industry functions importantly in the wider economy in China, as explained in Sect. 6.2 of this book. BUT this explanation may not provide all the factors that facilitating the rapid growth of Chinese trust industry. As hypothesized in Chap. 4 of this book, the concept of social capital can help to identify other factors which are also important to the rapid development of Chinese trust industry. The concept on social capital suggests that social networks are valuable to the actors within social networks.22 Particularly, the research on social capital suggests that mutual trust has substantial value in establishing commercial relationship between service providers and consumers. In this book, it is submitted that social capital helps to incentivize the transactions between the trust companies and investors in China, that is to say, to promote the investors to hand off their property to financial institutions for management in spite of legal uncertainty regarding the location of ownership of the trust property. In the social capital theory, the density of a given social network is found by dividing the number of all existing links between the actors by the number of potential links within the same set of actors. The higher the resulting number, the denser a network is. Dense networks are most likely to be found in small, stable communities with few external contacts and a high degree of social cohesion. Analyzing the density of networks can answer a number of potential research questions relating to how social networks might affect individuals’ behavior, attitudes, performance or beliefs.23 From a social network perspective, Chinese trust industry is observed as a dense network currently, and is expected to be a sparse network in the near future with the development of trust business. Although we are not going to conduct the social network analysis in this research, the concept of density in social network theory allows us to qualitatively understand the nature of Chinese trust industry network.

6.3.1

Evidences for the Dense Network Representing China’s Trust Industry24

China trust business is deemed to be activities among relatively small group of people or institutions. The networks of such trust business are submitted to be a dense network with tightly-knit groups. The following factors provide evidences for this assumption.

22

Easley and Kleinberg (2010), p. 62. Prell (2012), p. 122. 24 This part is a reproduction of a section in Meng (2016), pp. 105–107. 23

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1. Single trusts constitute a large percentage of trust business Single trusts manage assets of a single investor. As shown in Table 6.1, nearly 63% of total trust assets in China’s trust industry is managed in form of single trusts, that is to say, most of trust funds are from single institution or individual. The transaction structure of single trusts is relatively simple (see Fig. 6.3). Trust companies channel money from individual or institutional investors such as companies, wealthy individuals, and even banks. The cooperation between banks and trust companies constitutes a major resource for single trusts. In practice, it always goes like this: Commercial banks cannot lend to SMEs or projects in frothy industries, such as real estate, mining, or steel, where regulators see signs of overinvestment and so have instructed banks to curb lending. Then the banks take loans off their balance sheets by using trust companies as intermediaries to package and securitize loans for resale.25 Lack of active management ability and investment ability makes trust companies in China become business channel or platform for commercial banks. The density of the network in this business model is relatively high. It is considered to be a small community with certain actors who has direct or indirect connection with one another. Banks are the most important funding source for trust assets. In particular, bank WMPs account for 28.8% of single-unit trusts. The remaining 41.2% is accounted for by banks’ own funds and non-bank financial institutions’ own funds. Although there is no detailed data on the breakdown of contribution from own funds of banks and non-bank financial institutions, industry analysts believe that banks’ own funds dominate this source of single-unit trust assets, with estimates ranging from 50– 75%. Taken together, bank-related funds (WMPs and own funds) directly account for 50–60% of single-unit trust assets or equivalently 35–40% of total trust assets. Taking into account bank resources involved in combined trust and properties trust, industry analysts estimate that close to half of trust assets are directly funded by banks.26 2. Trust companies rely on Commercial banks for client referrals Collective trusts manage the assets of a number of investors. At the end of 2014, Collective trusts constitute about 30% of total trust assets in China. In a collective trust plan, a trust company handles a pooled group of trust accounts. Although trust companies in China are making efforts in building their customer base, they currently rely heavily on commercial banks to find investors because of lack of their own client resources (see Fig. 6.4).

25

China Trustee Associate, Research Report. See also Zubi (2012) Murky Waters: The rapidly-evolving landscape of Chinese SME finance. http://www.geopoliticalmonitor.com/murkywaters-the-rapidly-evolving-landscape-of-chinese-sme-finance-4715/. Accessed 15 April 2015. 26 Asian Development Bank Consultant’s Report (2014) The People’s Republic of China: knowledge work on shadow banking—trust funds and wealth management products. http://www. adb.org/sites/default/files/project-document/80950/shadow-banking-trust-funds-and-wmps-prc.pdf . Accessed 6 May 2015.

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Fig. 6.3 Conceptual transaction structure of single trusts

According to the Measures for the Administration of Trust Companies’’Trust Plans of Assembled Funds promulgated by the China Banking Regulatory Commission (CBRC) in 2007 (revised in 2009), only “qualified investors” may invest in collective trust schemes.27 As a rule, only investors with a minimum of RMB1 million (USD 160,000) to invest per trust scheme are considered. Compared with other financial institutions in China, commercial banks are the most trusted financial institutions by citizens,28 and have most sophisticated retail networks and sizable customer bases. Most of the HNWIs in China are clients of banks, which enable banks to make the most of their network to sell trust products for trust companies. The connections between big commercial banks and HNW customers are strong due to the improvement of, for example, relationship managers’ capabilities.29

27

Measures for the Administration of Trust Companies’ Trust Plans of Assembled Funds, article 6 provides that: The term “qualified investor” as mentioned in the preceding paragraph refers to a person that satisfies any of the following conditions and is able to identify, judge and undertake the corresponding risks of a trust plan: (1) a natural person, legal person or any other organization established according to law whose minimum investment in a trust plan is 1 million yuan or more; (2) a natural person whose aggregate individual or family financial assets exceed 1 million yuan at the time when he/she subscribes the trust plan and who can provide the relevant property certificate; (3) a natural person whose annual income exceeds 200,000 yuan for the latest three years or whose total annual income of husband and wife exceeds 300,000 yuan for the latest three years and who can provide the relevant income certificate. 28 See Sect. 4.5. 29 Some of the largest trusts are closely associated with banks in terms of ownership. For example, CITIC Trust and CITIC Bank are subsidiaries of the CITIC Group. CCB Trust’s controlling shareholder is the China Construction Bank. Industrial Trust’s majority owner is Industrial Bank of China.

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Fig. 6.4 Conceptual transaction structure of collective trusts in China

3. Guanxi plays a role in relationship marketing of trust products From the documentations and interviews, we can observe the importance of the ‘Guanxi’ network of managers in companies for doing financing and asset handling businesses in China (see Fig. 6.5). Managers in relevant companies have various connections with each other. Additionally, managers in financial institutions are required to make use of their connections to high net worth individuals for the sale of the private wealth management services or trust products. For example, in a recruitment for relationship managers of Industrial and Commercial Bank of China (ICBC), it describes one of the role of this position as: “Source new business from HNW individuals through referrals, marketing activities and personal contacts.” This is also evidenced by the information provided by one interviewee of the empirical research in Chap. 5.30 On the other hand, there are two types of investors of commercial trusts in China: HNWIs and institutional investors (primarily commercial banks). The HNWIs are somehow, directly or indirectly, connected with one another. Individual investors are more likely to engage in activities of the same social groups (e.g. golf clubs, business association), which makes them share certain similar background. Their experience of trust products can be spread among their circle. 4. Ownership concentration of China trust companies is high Almost all the 68 trust companies in China have the state-owned shareholders as their controlling shareholders. Statistics show that “in 2011, 64 trust companies disclosed the annual reports which showed that most of the controlling shareholders of China trust companies have the background of state-owned assets. For the 64 companies, the median of the total share proportion of the controlling shareholders and the disclosed related parties is 70%, there are 49 trust companies that the share proportion of controlling shareholders and the disclosed related parties is more than 50%. Seeing from the number of shareholders, there are 2 companies that have one shareholder, 13 companies that have two shareholders and 15 companies that have 30

See Sect. 4.5.

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Fig. 6.5 Conceptual network of trust business in China

three shareholders in the 64 trust companies.”31 Therefore, it can be concluded that the ownership concentration of China trust companies is high and the number of the shareholders is small. The small range of shareholders in the trust companies also implies a dense network with tight links.

6.3.2

Mutual Trust and Network Effects of Dense Network

Sociologists have argued that, embeddedness32 generates mutual trust, if people are linked by embedded edges, it is easier for them to trust each other and to have confidence in the integrity of the transactions that take place between them.33 A dense network may facilitate cooperation between actors within the network, because most actors have access to social capital so that they can take effective actions. Since most actors in a dense network have connections with each other,

31

Tang (2014), p. 2. For the theory of embeddedness, see Granovetter (1985), pp. 481–493. 33 Easley and Kleinberg (2010), p. 58. 32

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cooperation rules would be easily established.34 If actors in a network do not trust one another, a system of formal rules and regulations will be needed in order to achieve cooperation.35 In the possible dense network of Chinese trust industry, actors within it (the settlor, trustee, beneficiary etc.) probably have quite strong mutual trust with each other. Such relatively high degree of mutual trust can play a substantial role in the establishment of a business contract between trust companies and the investors. Mutual trust can substitute for the legal certainty, so that investors are willing to transfer their property to the trust companies in spite of legal uncertainty regarding the ownership of trust property, placing themselves at risk of losing ownership of trust property. In addition, according to the theory of network effects,36 if a large number of consumers have self-fulfilling expectations of a good or service, “consumer confidence” of the good or service will be generated. People are more likely to purchase or utilize this kind of goods or services. By contrast, if people have no confidence in the success of the good or service, few people will purchase it due to the network effects.37 In China, it’s effective in obtaining profits to purchase trust products. The satisfying experiences of the high net worth individuals who invest in trust products can be easily disseminated through the dense network of HNW consumers. In our empirical research, one interviewee who invested into a collective trust product, explained that: I seldom invest into high risk financial products, and even don’t know what trust product is. Recently I am interested into trust products because my colleagues at work are talking about it. Some colleagues got stable interest return every year, and the rate of return is much higher than other investment ways (such as deposits, bonds, gold, and stocks.) Our company even initiated a collective fund, collecting small size of idle funds from employees, and then invested the collective fund into trust products (See Appendix III-Question 5: Answer 3).

However, network effects can also work in a negative way. Since 2014, there are more trust default cases happening in China, although some of them are avoided in undisclosed ways. The first wave of trust products in China, particularly those invested into real estate markets and coal mining markets, were due to mature in 2014. It is reported that some big trust companies (such as China Credit Trust Co., Zhongrong International Trust Co., and Jilin Province Trust Co.) were involved into the risk of default. It was always on news that consumers, who were facing the risk of losing their assets invested into these trust products, protest against the trust

34

Walker et al. (2013), p. 176. Fukuyama (1995), p. 27. 36 Easley and Kleinberg (2010), p. 449. “A network effect is the effect that one user of a good or service has on the value of that product to other people. For some kinds of decisions, people are beneficial when they align their behavior with the behavior of others.” 37 Easley and Kleinberg (2010), p. 456. 35

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companies or the commercial banks through which they bought trust products. Network effects would work in this case, decreasing the consumer confidence of the trust products.

6.4

Interim Conclusion

As discussed above in this Chapter, Chinese commercial trust industry has been thriving over the past decade. Trust companies in China today are primarily engaged in two businesses: a private placement business and a conduit business. In this Chapter, China trust business is deemed to be activities among relatively small group of people or institutions. The network of such trust business is submitted to be a dense network. The following factors provide evidences for this assumption: (1) Single trusts constitute a large percentage of trust business; (2) Trust companies rely on Commercial banks for client referrals; (3) Guanxi plays a role in relationship marketing of trust products; (4) Ownership concentration of China trust companies is high. In the dense network of Chinese trust industry, guanxi and some personal relations can be utilized by the actors within the network to achieve cooperation, or specifically, to promote the establishment of a trust transaction between the asset management service providers and the investors. Trust companies in China relied heavily on their managers’ guanxi network to build the customer base. For current types of Chinese trust business, mutual trust as social capital plays a substantial role in establishing a business contract between the service providers and consumers. Because of the relatively high degree of mutual trust between the actors within China trusts dense network, as outlined in Sect. 6.3.2, above, people are willing to transfer the trust property to the trustees.

References Asian Development Bank Consultant’s Report (2014) The People’s Republic of China: knowledge work on shadow banking—trust funds and wealth management products. http://www.adb.org/ sites/default/files/project-document/80950/shadow-banking-trust-funds-and-wmps-prc.pdf. Accessed 6 May 2015 Easley D, Kleinberg J (2010) Networks, crowds, and markets: reasoning about a highly connected world. CUP, Cambridge English D, Zhu Y (2014) Comparing the Chinese Trust Law with the US Uniform Trust Code. Trusts Trust 20(1&2):87–92 Fukuyama F (1995) Trust: the social virtues and the creation of prosperity. Free Press, New York Granovetter M (1985) Economic action and social structure: the problem of embeddedness. Am J Sociol 91(3):481–510 Hsu C (2016) Eastern Trusts, Western contracts: the transition from contract to trust in China’s trust industry. Eur Bus Org Law Rev 17:173–193

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KPMG (2010) China’s trust sector: the next chapter. https://www.kpmg.com/CN/en/ IssuesAndInsights/ArticlesPublications/Documents/China-trust-sector-next-chapter-201002. pdf. Accessed 6 May 2015 Meng Z (2016) Legal certainty and trusts in China. In: Fenwick M, Wrbka S (eds) Legal certainty in a contemporary context: private and criminal Law perspectives. Springer, Berlin, pp 89–111 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015 Prell C (2012) Social network analysis: history, theory and methodology. Sage, London Sekine E (2015) Reforming China’s financial markets: the problems of shadow banking and non-performing loans. Public Policy Rev 11(1):93–139 Tang W (2014) Analysis on the sustainable development of China trust industry. J Syst Manag Sci 4:1 The Economist (2014) China: a question of trust. http://www.economist.com/news/special-report/ 21601622-or-not-case-may-be-question-trust. Accessed 20 May 2014 Walker G, Kogut B, Shan W (2013) Social capital, structural holes and the formation of an industry network. In: Costa AC, Anderson N (eds) Social capital: organizational advantage and inter-organizational networks. Trust and social capital in organizations, vol 4. Sage, London, pp 173–200 Waters D (2007) The future of the trust (Part II). J Int Trust Corp Plan 14(1):1–22 Zubi H (2012) Murky Waters: the rapidly-evolving landscape of Chinese SME finance. http:// www.geopoliticalmonitor.com/murky-waters-the-rapidly-evolving-landscape-of-chinese-smefinance-4715/. Accessed 15 April 2015

Chapter 7

The Chinese Trust Industry in the Near Future Towards a Sparse Network: From Guanxi to Institutionalized Trust?

Abstract This Chapter first explains the potential problems of Chinese trust industry from the perspective of both the service providers and the consumers. In this respect, it analyzes the unsustainability of current trust business model, and also illustrates the demand of asset management services, especially family trusts, for Chinese HNWIs. Then this Chapter points out that the Chinese trust network is transforming towards a sparse network. Actors within a sparse network are less likely to have social capital that they can rely on to achieve cooperation. In a sparse network, lack or low degree of mutual trust between actors within the network is more likely to happen. Consequently, trust business in China is facing a dilemma, which is also analyzed in this Chapter. On one hand, there is an increasing demand of trust products for HNWIs; on the other hand, the industry is stepping into the decline stage of the business life cycle. In view of this, this chapter provides a possible justification of Article 2 of Chinese Trust Law; then it explains the reasons why the ambiguity of trust law regarding the ownership of trust property might matter in the near future. Following this is a suggestion on possible solutions that could be provided by the trust law for the potential trust business dilemma.

7.1

Potential Problems of Chinese Trusts: From the Perspective of Service Providers

Chinese trust industry has grown dramatically since 2007, as described in Chap. 6. However, Chinese trust industry is still in the elementary phase and facing lots of challenges. From the perspective of service providers, especially trust companies, potential problems might occur in the development of Chinese trust industry due to the following factors.

© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2_7

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Unsustainability of Chinese Trust Business Model

As estimated by professionals, currently around 49% of the trust industry revenues can be attributed to private placement investment business, and approximately 39% is attributed to conduit business.1 However, this profit model that trust companies have depended on is predicted by some practitioners and scholars to be not sustainable in the future. 1. The diminishing conduit business Conduit business is a Chinese concept. It refers to the trust business that “provides a conduit to banks and other financial institutions that are restricted from investing into certain asset classes or launching certain wealth management products.”2 In conduit business, trust companies play no active role in raising funds, neither in managing the trust assets. But this business model is predicted by Chinese industry analysts to diminish in a few years.3 First of all, Chinese government starts to impose stricter regulations on the cooperation between banks and trust companies. The conduit business was driven by the “Bank-Trust Cooperation Products (银信合作产品)”. China Banking Regulatory Commission (CBRC) has permitted bank wealth management products (WMPs) to invest into fund trust plans in 2007.4 However, it is observed by professionals that “trust loans developed into a mechanism designed to help commercial banks to escape from CBRC’s loan quotas.”5 Since 2009 the bank-trust

1

Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 2 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 3 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 4 In 2007, CBRC issued to regulations related to trust companies: Measures for the Administration of Trust Companies; and Measures for the Administration of Trust Companies’ Trust Plans of Assembled Funds. 5 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015.

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corporation started to be constrained by regulatory restrictions,6 in order to ensure the effectiveness of lending quotas. In 2010, CBRC declared that “Bank-Trust Cooperation Products had evolved into a conduit for off-balance sheet loan making for bank and subsequently put significant restrictions on this activity.”7 In Addition, banks are required by regulators to bring these Bank-Trust Cooperation Products back on-balance sheet of banks by the end of 2011.8 Secondly, in the short-term, the participation of securities companies, mutual fund companies and insurance companies will reduce the market share of trust companies in the conduit business due to regulatory changes. The China Securities Regulatory Commission (CSRC) issued two relevant regulations in 2012: “Trial Implementation Measures for the Customer Asset Management Business of Securities Companies”, and “Trial Measures for Fund Management Companies to Provide Asset Management Services for Specific Clients”. According to these regulations, the asset management departments of securities companies and the subsidiaries of mutual fund firms are allowed to invest into more diverse asset classes, which in effect enabled them to involve into the conduit business, in direct competition with trust companies. The securities companies and mutual fund firms can design their own financial products to manage the assets directly. Similar measure was taken by China Insurance Regulatory Commission (CIRC) in 2013 as well. In 2013, CIRC issued the “Notice of the China Insurance Regulatory Commission on Relevant Issues concerning the Pilot Operation of Asset Management Product Business by Insurance Asset Management Companies”, which led to a similar effect to the above-mentioned regulations issued by CSRC. Because the capital requirements to these new players are lower than that to trust companies, there is a pricing advantage for the new players to do conduit business.9 Thirdly, it is estimated that “in the mid- to long-term, banks will likely be able to create wealth management products by directly leveraging trust as a legal form, thereby eliminating the market for conduit business completely. With the launch of the ‘bank-managed asset management plan’, banks are able to launch wealth

In December 2009, CBRC issued the “Notice on Further Regulation of Bank-Trust Cooperation”, prohibiting the use of WMPs by way of single-unit trust, the main form of bank-trust cooperation. 7 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 8 In August 2010, CBRC issued the “Notice on Regulation of Cooperation between Bank WMPs and Trust Funds.” 9 For example, the risk capital weighting for securities companies in conduit business is around 2%, in contrast to roughly 10% in trust companies. By June 2013, the asset under management of securities companies had reached CNY 3.4 trillion, the majority of which came about as a conduit for the banks’ wealth management products. See Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013, p. 24. http://www. mckinseychina.com/wp-content/uploads/2013/12/mckinsey-china-the-coming-transformation-ofchinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 6

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management plans directly without going through any other intermediary.”10 In October 2013, CBRC launched a pilot programme: “bank-managed asset management plan.” Under the pilot project, CBRC allowed 11 banks to sell asset management plans directly to customers. Unlike former wealth management products, the project does not allow banks to assign an expected return to a product. It is also aimed at shattering a widespread assumption among Chinese investors that products, even high-yield ones, provide guaranteed returns when offered by state-owned banks.11 By November 2013, 11 banks had enrolled into the nation’s pilot program and launched asset management departments. Although this program is on a small scale and therefore have a limited impact on the conduit business for the time being, the impact on the overall conduit business will come out in a long run. As a result, it’s estimated by some professionals that “close to 40% of trust companies’ current assets under management will disappear in the mid- to long-term.”12 2. The volatility of the private placement business Private wealth management is an emerging area in the Chinese financial services industry, where financial institutions would provide HNWIs with comprehensive advisory services. Although the private placement investment business creates around half of the trust industry revenues, it is risky and volatile in the long term. The main reason for this is that trust loans mainly goes to more risky segments, and the investment themes and hotspots are constantly switching (Fig. 7.1). As shown in Fig. 7.1, a large portion of trust loans moved to the real estate market and even into capital markets after 2010, this is mainly because the central government has imposed tighter controls over the local government financing vehicles since 2010. This indicates that the private placement business is opportunistic in nature, which “not only poses big uncertainties on trust companies’ financials on a year-by-year basis, but also hampers their ability to build a more sustainable business platform and industry know-how.”13

10

Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013, p. 24. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 11 Wildau et al. (2013) China Pilot Scheme Aims to Shatter Assumption; Investments Are not Guaranteed. http://www.reuters.com/article/2013/10/10/us-china-banks-debt-idUSBRE99915D20 131010. Accessed 20 April 2016. 12 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013, p. 24. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 13 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013, p. 37. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015.

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Fig. 7.1 Impact of rapidly changing environment on trust loan volume14

Additionally, since other financial institutions (such as security companies and mutual fund companies) start to join the trust business market, the competition is intensifying. Ultimately, the role of trust loans might be partially replaced by the development of more efficient and deeper capital markets.

7.1.2

Lack the Capability of Property Management in Chinese Trust Companies

Since trust companies can operate business across different markets (e.g. money market, capital market and industry market), they engaged in diversified fields. However, it is difficult for Chinese trust companies to cultivate core competence, because their business fields switched frequently from one hot spot to another (Fig. 7.1). A unique classification of the trust industry in China by the China Trustee Association is by the role played by trustees in managing and funding trust assets (Table 7.1). If trust companies play no active role in either the fund-raising or investment management, the relevant assets under trust are grouped under “Non-discretionary” (32.65% of total at end-2014, see Table 6.1). For the other 67.35% of total assets, trust companies were either active fund-raisers for

14

[Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust indus+try: China Trust Industry Report 2013, p. 37. http://www.mckinseychina.com/wp-content/uploads/ 2013/12/mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015].

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Table 7.1 Trust assets managed by Chinese trust companies in the fourth quarter of 2014

Trust assets (CNY 10907.111 billion) Divided by trustee duty (%) Financing Investment Non-discretionary Source China Trustee Association

33.65 33.70 32.65

pre-identified projects (33.65% of total, classified as “Financing”) or active asset managers (33.70% of total, classified as “Investment”). However, chief among the segments of “Non-discretionary” and “Financing” is the conduit business.15 Lack of active management ability and investment ability makes China trust companies become business channel or platform for other professional financial institutions such as commercial banks, securities companies and so on. Though the amount of assets managed by trust companies is huge, the trust companies are in weak position in the cooperation with other financial institutions and only earn cheap channel fee.16

7.2 7.2.1

Potential Problems of Chinese Trusts: From the Perspective of Consumers Demand for Property Management Services in China

According to the “Chinese Mass Affluent Report 2014,”17 the population of China’s “mass affluent” [those with investable assets in the range of CNY 600,000 to 6 million (USD 96,000 to 960,000)] was estimated to be 11.97 million in 2013, and the number was expected to skyrocket by more than 2 million by the end of 2014. The “China Private Wealth 2013 Report”18 shows that the number of high net worth individuals (HNWIs)19 in China totaled more than 700,000 in 2012. In terms of total worth, investable assets owned by Chinese HNWIs reached RMB 27 trillion in 2013 (see Figs. 7.2 and 7.3).

15

For conduit business, see explanation in Sect. 6.1.1. Tang (2014). 17 Forbes China and CreditEase, 2014 Zhongguo Dazong Fuyu Jieceng Caifu Baipishu (2014 Chinese Mass Affluent Report). http://www.forbeschina.com/upload/Bj9O8CwBlZ.pdf. Accessed 6 May 2015. 18 Bain & Co., China Merchant Bank (2013) China private wealth report 2013. http://www.bain. com/Images/2013_China_Wealth_Report.pdf. Accessed 6 May 6 2015. 19 According to the “China Private Wealth 2013 Report,” HNWIs refer to individuals with at least CNY 10 million (approximately $1.6 million) in investable assets. Ultra-HNWIs are defined as individuals with at least CNY 100 million (approximately $16 million) in investable assets. 16

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Fig. 7.2 Number and composition of Chinese HNWIs from 2008 to 201320

Fig. 7.3 Total wealth and distribution of Chinese HNWIs’ investable assets from 2008 to 201321

The increasing HNWIs population in China generates great demand for assets management services. As shown in industry analysis, Chinese HNWIs usually allocate their assets to savings, stocks and real estate, but these investments account for decreasing portions (see Fig. 7.4). Because of market volatility, Chinese investors are less willingly to invest in stock, funds and other domestic investments, and seek lower-risk investment products (see Fig. 7.4). The survey made by the researchers of the “2013 China Private Wealth Report” shows that many HNWIs 20

(Bain & Co., China Merchant Bank (2013) China private wealth report 2013. http://www.bain. com/Images/2013_China_Wealth_Report.pdf. Accessed 6 May 6 2015). 21 (Bain & Co., China Merchant Bank (2013) China private wealth report 2013. http://www.bain. com/Images/2013_China_Wealth_Report.pdf. Accessed 6 May 6 2015).

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Fig. 7.4 Asset allocation of Chinese HNWIs from 2009 to 201322

have indicated that they want to make conservative investments and preserve liquidity for potential investment opportunities. As shown in Fig. 7.4, many Chinese investors misunderstand that trust products are fixed-income products. In addition, the investors think it is difficult to fully recognize all the risks because of the product’s complexity. As a result, they mainly rely on the brand and reputation of issuers (e.g. trust companies) and distributors (e.g. commercial banks) of trust products to make investment decisions. More importantly, investors think issuers and distributors have guaranteed payments to protect their own brand and credit,23 so there should not be any payment delay risks. These misunderstandings cause some investors to underestimate the risks of trust products, and raised investment interest because of the high expected returns of the product.24 However, HNWIs are becoming more aware of trust risks because default cases in trust industry repeatedly happened in early 2014 and are estimated to become more in the following years.

22

(Bain & Co., China Merchant Bank (2013) China private wealth report 2013. http://www.bain. com/Images/2013_China_Wealth_Report.pdf. Accessed 6 May 6 2015). 23 For the reference of “implicit principal guarantee,” see Sect. 6.2.2. 24 Bain & Co., China Merchant Bank (2013) China private wealth report 2013. http://www.bain. com/Images/2013_China_Wealth_Report.pdf. Accessed 6 May 6 2015.

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Fig. 7.5 Conceptual stages of the world’s wealth markets development25

The middle-class citizens in China are quite frustrated with the narrow investment channels. Chinese private wealth markets are considered to be at a product-driven stage today, with a narrow bundled product set offering from the wealth management service providers (see Fig. 7.5). With the development of China’s private wealth management market, HNWIs’ demands in investment management have become more sophisticated.26 The investment management institutions should further improve their own capabilities and expertise, and provide the products based on customers’ diversified risk appetite.

7.2.2

Family Trusts Emerging

As shown in Chap. 6, commercial trusts have developed at a rapid pace in China, it mainly provide financing for the SMEs from the individual or institutional investors. However, family trusts purporting to help manage family property are at the very beginning stage.27

25

(The Boston Consulting Group and CCB Private Bank (2011) China wealth 2011—wealth markets in China: Seeking the opportunity to lead. http://www.bcg.com.cn/en/files/publications/ reports_pdf/BCG_China_Wealth_2011_ENG_Final.pdf. Accessed 6 May 2015). 26 Chinese High Net Worth Individuals Shift Wealth Management Focus from Growing to Preserving Assets; Overseas Diversification on the Rise, Finds New China Private Wealth Report (May 7, 2013). http://www.bain.com/about/press/press-releases/chinese-high-net-worthindividuals-shift-wealth-management-focus-from-growing-to-preserving-assets.aspx. Accessed 11 May 2015. 27 Gao (2014).

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Currently, family trusts are not widely used in China. One reason might be that the trust concept is new to Chinese citizens. Chinese trust law was enacted in 2001, and its main purpose is to develop the commercial trusts as a financial scheme. Another reason lies in that it is a tradition for Chinese people to manage family within the family rather than by outsiders. According to a survey conducted by China Merchant Bank and Bain Company, it is only in recent years that Chinese HNWIs become more reliant on wealth management service providers. The survey findings indicated that around 80% of the respondents in the survey used family/friends/self-management as their primary investment channels before 2010 (see Fig. 7.6). A third reason relates to the potential risk of losing the ownership of trust property in the establishment of a trust.28 Chinese people regard the ownership rights very important because private ownership has only been recognized and protected by law in the recent decades. The Constitution Law of China has explicitly stated the protection of private property rights when it was amended in 2004.29 Accordingly, the Property Law of China which was enacted in 2007 recognized the ownership of private property.30 Although the private property ownership is protected by Chinese courts before the enactment of the Property Law, citizens are afraid of losing the ownership of their rights because of the lack of regarding legislation. Increasingly, the demand for family trusts is emerging among Chinese HNWIs. According to statistics (see Fig. 7.7), about one-third of HNWIs and half of ultra-HNWIs in China now have expressed interest in wealth inheritance planning. More than half of Chinese ultra-HNWIs consider choosing family trusts as the tool

28

Gao (2014). Article 13 of the Constitution Law of China was amended in 2004 as follows.

29

[Protection of Private Property] (1) Citizens’ lawful private property is inviolable. (2) The State, in accordance with law, protects the rights of citizens to private property and to its inheritance. (3) The State may, in the public interest and in accordance with law, expropriate or requisition private property for its use and shall make compensation for the private property expropriated or requisitioned. 30

Article 66 of the Property Law of China provides that. The legitimate properties of individuals shall be protected by law and shall not be occupied and damaged by any institution and individual.

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Fig. 7.6 The changing trend for investment channels among Chinese HNWIs from 2009 to 201331

Fig. 7.7 Chinese HNWIs’ wealth preservation arrangement32

of wealth inheritance planning, while 15% of them have already done or started to do so.

31

(Bain & Co. and China Merchant Bank (2013) China private wealth report 2013. http://www. bain.com/Images/2013_China_Wealth_Report.pdf. Accessed 6 May 6 2015.).

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However, on the supply side, there are currently very few family trust offerings in mainland China.33 Most ultra-HNWIs get to know and start to be familiar with family trusts through private banks in Hong Kong. Although it is required by foreign laws to transfer the ownership of trust property in establishing a family trust, Chinese ultra-HNWIs increasingly choose to set up family trusts overseas, as they think that the trust products provided by foreign financial institutions with high reputations are more sophisticated and their interests can be better protected. Additionally, the ambiguity of Chinese Trust Law regarding the ownership of trust property has in effect encouraged people to transfer their property to foreign institutions.34

7.3

Nascent Transformation of the Chinese Trust Network: Towards a Sparse Network

The dense social network surrounding Chinese trust business, as explained in Chap. 6, facilitated the rapid growth of current Chinese trust industry. However, with the transition of Chinese trust industry in terms of the business model, the number of potential consumers (HNWIs) for assets management services increases dramatically (see Fig. 7.2). As the size of the network becomes larger, the actors within the network will be sparsely connected with each other, with most actors having only few links. Sociologists have shown that network density tends to attenuate as the network grows larger.35 Predictably, the Chinese social network surrounding the trust industry will expand, and the density of this network would accordingly become lower. In addition, there are also possibilities that the urbanization, the way of people’s working, the nuclear family, etc. can be accelerate the society becoming sparse. It is proposed in this research that the network of Chinese trust business in the near future is likely to transform from a dense network towards a sparser network. In a sparse network, actors are more likely to reserve their ownership rights rather than put themselves into risk, unless institutionalized trust is built between service providers and potential customers. In a sparse network, institutionalized trust is essential for the efficient operation of a business. Institutional factors can build an individual’s confidence in the institutional mechanisms that make the other party

32

(Bain & Co. and China Merchant Bank (2013) China private wealth report 2013. http://www. bain.com/Images/2013_China_Wealth_Report.pdf. Accessed 6 May 6 2015). 33 There has long been a dearth of onshore family trust service in China until the launch of family trust products by three financial institutions in 2013. They were Ping An Trust Co, in partnership with Ping An Bank; Beijing International Trust Co in partnership with Beijing Bank; and China Foreign Economy and Trade Trust Co. in partnership with China Merchants Bank. See Ho (2014). 34 Gao (2014). 35 Mayhew and Levinger (1976).

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honest and consistent. In order to facilitate the growth of Chinese trust business in the future, it is necessary to build institutionalized trust, one way of which might be the clarification of the Trust Law. A sparse network is connected by a fewer number of links only. In a sparse network, links are more difficult to create. Actors within a sparse network are less likely to have social capital that they can rely on to achieve cooperation. In a sparse network, lack or low degree of mutual trust between actors within the network is more likely to happen. This is evident by the interviews conducted in this research. In the interviews, the new middle class citizens in China show low degree of trust to the trust companies.36 In recent years, more and more people in China are looking for financial products with higher return because of the increasing inflation and the decreasing interest rate of bank deposit. However, for most people, the domestic channel of investment in China is relatively narrow. People do not want to expose themselves to risky products in which their friends or relatives rarely invest.37 In a sparse network, investors in Chinese private wealth market are more likely to reserve their ownership rights rather than put themselves into risk because of the ambiguity of Chinese Trust Law.

7.4

Chinese Trust Business Dilemma

It is addressed in Sect. 7.2.1 of this book that the demand for the trust scheme in China is increasing, but on the contrary, the Chinese trust industry is facing the decline now.38 As the empirical findings shown in this research, China’s trust business has been growing in a rapid speed since 2007 (see Figs. 6.1 and 6.2). However, because there are many potential problems existing in Chinese trust industry, the growth of trust industry may slow down. Professionals estimate that the rate of growth in funds managed under the trust companies may slow down.39 China Trustee Association also issued statistics showing that the growth rate of assets under management of trust companies is decreasing since 2014.40 36

See Sect. 5.5. See the interview findings in Sect. 5.5. 38 See e.g. Yuan (2014); China Trust Sector Reports Slower Growth; Default Risks in Focus (Feb. 13, 2014), http://www.cnbc.com/id/101416270. Accessed 15 May 2015; China Trust ‘Timebomb’ Ticks as Credit Suisse Sees Rejig (July 4, 2014), http://www.bloomberg.com/news/articles/201407-03/china-trust-timebomb-ticks-as-credit-suisse-sees-rejig. Accessed 15 June 2015. 39 China Trust Industry Growth to Slow by Half, Huabao Says (Aug. 2, 2013), available at http:// www.bloomberg.com/news/articles/2013-08-01/china-trust-industry-growth-to-slow-by-halfhuabao-says. Accessed 23 June 2015. 40 China Trustee Association, Main Business Data of Trust Companies (1st Quarter 2014) (May 6, 2014), http://www.xtxh.net/xtxh/statisticsEN/20044.htm. Accessed 15 April 2015. China Trust Asset Growth Slows in Shadow Banking Campaign (Bloomberg, Aug. 12, 2014), http://www. bloomberg.com/news/articles/2014-08-12/china-s-trust-asset-growth-slows-amid-shadowbanking-crackdown. Accessed 11 May 2015. 37

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The life cycle theory of the firm is created by economists,41 and is commonly employed to describe the progression of the successful business through growth phases. Steinmetz42 proposes a model based on three phases of growth, whilst Greiner43 proposes a five-stage “evolution-revolution” model, and Hanks et al.44 identify common developmental stages based on the comparison of a number of stage models, namely start-up, expansion, maturity, diversification, and decline stages. According to business life cycle theory, businesses go through a relatively predictable life cycle. It is not always the case that each stage of the business life cycle occurs chronologically. Some businesses quickly go from the start-up stage to decline stage, while others stay in the established stage and not going expansion.45 It is a common idea of many professionals in China that Chinese trust industry is stepping into the decline stage. Trust companies engage in innovatively changing their business model, in order to avoid the decline stage and maintain a positive business life cycle. They are trying to focus on the following three business models as the future growth arenas (see Fig. 7.8). Trust professionals in China predict that private placement business will remain as a core business for most trust companies in China. However, the practitioners point out that, unlike the current private placement investment banking model, which relies heavily on “Guanxi”, or relationships, in order to attract HNWIs for, the new model requires direct and highly specialized coverage of underlying assets in target sectors. Moreover, trust companies need to strengthen their institutional coverage by building a dedicated and professional team, because institutional investors46 will become more sizable.

41

See generally Penrose (1952), Penrose (1995), Rostow (1991). Steinmetz (1969). 43 Greiner (1972). 44 Hanks et al. (1993). 45 Rogerson (2010). 46 As professionals in some trust companies predicted, banks, insurance companies, wealth management institutions and large corporations are the key potential key institutional investors for trust products. See Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/ 2013/12/mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015. 42

7.4 Chinese Trust Business Dilemma

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Fig. 7.8 Three business models that Chinese trust companies will focus on47

Sophisticated trust companies could establish an important part of their business in the area of alternative asset.48 At the moment China’s HNWIs have only invested about 10% of their assets in these products, Mckinsey analysis shows. However, the 2012 McKinsey survey on Chinese HNWIs shows that more than 60% of respondents of the survey are very interested in buying more alternative investment products such as trust products and private equity funds. This trend creates an attractive opportunity for trust companies to develop this business and make it a core revenue and profit source. In the not too distant future, it is expected by some practitioners in trust industry that China will have its own versions of such companies as “Blackstone” and “Carlyle”, and some of these future asset management giants in China might originate from the trust industry.49 Trust companies that pursue to provide property management service for HNWI clients in China could enter the area of the private wealth management (including

47

(Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015). 48 Historically, examples of alternative assets include real estate, commodities, as well as rare coins and stamps, artwork or trading cards. More recently, the term of “alternative assets” has also come to be used to refer to other institutional asset classes including private equity, venture capital, trading strategy indices, and hedge funds. 49 Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015.

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family trusts). Personal wealth accumulation in China is astounding at a rapid speed. The number of HNWIs in China reached approximately 2 million by 2015, with accumulated investable assets increasing to RMB 60 trillion, compared to a mere 870,000 HNWIs and RMB 21 trillion HNW assets in 2010.50

7.5

The Way Forward: What Is Next?

With transformation of trust business model in China, the problem caused by the ambiguous regulation of Chinese trust law regarding the ownership of trust property might occur. This section first provides a possible justification of Article 2 of Chinese Trust Law, then it explains the reason why the ambiguity of trust law might matter in the near future. Following this is an address of possible solutions that could be provided by the trust law for the potential trust business dilemma.

7.5.1

Possible Justification of Article 2 in Chinese Trust Law

When we look back at the legislation procedure of the Chinese Trust Law in 2001, it is easily found that the legislators were frustrated to find a solution on the issue about the location of the ownership of trust property.51 In the view of one of the drafters of the Trust Law, since ownership in Chinese civil law is indivisible, placing ownership in trustee was perceived to impose great risk that the beneficiaries’ rights would not be fully protected. The Lack of the trust business tradition in China leads to insufficient regulation and low degree of standard of the liability of the trustee. This may not efficiently prevent the trustee abusing his/her/its power as the owner of the trust property. Likewise, settlors were thought to be reluctant to relinquish ownership and hence control over the trust property to a stranger-trustee. It draws an adequate balance between the need to grant the trustee the right to dispose of the trust property on the one hand, and the need to protect the beneficiaries’ rights on the other.52 Therefore, for reasons primarily related to the lack of a history of acceptance of the trust concept, the word “entrust” was deemed as more fit Chinese indigenous legal concepts and expression

50

McKinsey (2014) Global Wealth Management Survey 2014: An attractive Sector in Transition. http://www.mckinsey.com/*/media/mckinsey%20offices/france/pdfs/global_wealth_ management_survey_2014.ashx. Accessed 29 August 2015. 51 See Sect. 2.1.4 for the detail of legislation procedure of Chinese Trust Law. 52 Ho (2012), pp. 200–202.

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custom than “transfer” in the context of conventional understanding in China.53 This ambiguous wording might be proved justifiable.54 Another drafter pointed out that, a practical solution of Chinese Trust Law is the division of management power and beneficial enjoyment of trust property. Unlike trust laws in other countries, the Chinese Trust Law does not expressly provide that the ownership or property right of trust property is vested in the trustee, instead, it only states that the management power of trust property is transferred to the trustee, and the beneficiary could get the entire interests of trust property.55 The Trust Law directly provides the specific rights and duties of each party in the relationship of a trust, avoiding answering the question as to the location of ownership of trust property. The disputes arising during the implement of trust shall be settled according to the specific provisions of the Trust Law as to the rights and duties of each party, as opposed to considering the owner of the trust property.56 While lack of property transfer requirement may cause some inconsistences with the Chinese trust system,57 insisting on property transfer may even defeat the purpose of trust at this stage. At the time when the trust law was drafted, it was estimated by the legislators that the potential consumers of trust products have very low degree of (social) trust in trust companies. This is partially because at that time, very few people knew the concept of trusts, and trust companies had not cultivated good reputation among citizens. As a matter of fact, the trust institutions at that time rarely run trust business. They went beyond the standard scope of trust business, and took advantage of the trust license to do financing for certain institutions, which led to five rounds of nationwide rectification of trust business in late twentieth centuries.58 Moreover, there was also a lack of legislations to help the development of the consumers’ trust to the trust business. Public registration system and tax laws are two examples. For instance, if the trust property is a house, the transfer of the ownership of the house must be registered with the local real estate administration bureau to be effective. Since there are no preferential rules on the real estate trusts,59 the transfer from the settlor to the trustee will be recognized as a normal transaction. There is no public notice of the nature of the transaction, the transfer of ownership in a trust transaction may be considered to be the same with the transfer of ownership in a sales contract. Thus, the settlor may concern that the ownership of trust assets will be lost. For example, in the case that the trustee is not willing to return the property

53

Bian (2002). Jiang (2010), p. 415. 55 Du (2001). 56 See He (2005), p. 53. 57 See Sect. 3.2. 58 See Sect. 2.1.1. 59 In current Chinese trust practice, there is no registration of “transfer for the purpose of trust”, due to the lack of a comprehensive trust registration system. The Chinese authority is organizing the establishment of trust registration system in recent years. 54

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to the settlor after the termination of the trust, unless providing proofs, the settlor cannot claim his/her ownership rights, because the ownership of trust property is registered in the name of the trustee. Under this circumstance, if legislators choose to make certain that by the establishment of a trust, the ownership to trust property will be transferred to the trustee, there would be a potential chilling-effect. With low degree of trust in trust companies, potential consumers would be hesitate to choose the trust institutions as the assets manager, which might in the long run discourage the development of the trust business in China. In addition to the issue with respect to the public notice of the trust discussed above, taxes are also a concern of a potential settlor. For example, if a settlor wants to transfer his house located in Yangpu District of Shanghai City to the trustee, he or she may need to pay business tax (up to 5.56% of the market price of the house), individual income tax (up to 20% of any profit or 1% of the market price of the house), and stamp tax (up to 3% of the market price of the house). If the settlor intends the house to be transferred back to himself or to another beneficiary after a few years, then these taxes will need to be paid for the second time. The cost for title-transfer therefore is very expensive and discouraging for people to set up a family trust.60 Thus tax adjustment is also crucial to the development of trust business, however, Chinese authority is very slow to take action, because, on the one hand, the procedure of legislation in China usually takes much time to initiate; on the other hand, it is not urgent to adjust the relevant law because commercial trust is the main type of trust business in China. Typically, trust assets are not real property such as house, thus usually the amount of the taxes is not big. Legislation always comes after the practice. Based on the analysis above, it is understandable that Chinese Trust Law leaves open the issue regarding the ownership of trust property to the development of the practice. The clarification of the law at this stage might have negative effects on the development of the trust business. With the development of the practice, trust institutions are probably allowed to build social trust from consumers by the accumulation of successful transactions. It would be more easily acceptable to clarify the law until that stage.

7.5.2

Clarification of the Location of Ownership of Trust Property?

As described in Sect. 7.4, the Chinese trust business is facing a dilemma. For one thing, the demand of the trusts in China is predictably increasing; for the other thing, the trust industry is observed to be in its decline stage. To avoid the potential decline of trust business, the practice has shown a nascent transformation of business models in China.

60

Gao (2014).

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The social network surrounding the trust business is observed to be developing towards a sparse network from a dense network. In the dense network of Chinese trust industry, guanxi and some personal relations can be utilized by the actors within the network to achieve cooperation, or specifically, to promote the establishment of a trust transaction between the asset management service providers and the investors. Trust companies in China relied heavily on their managers’ guanxi network to build the customer base.61 Trust in the form of personal trust develops on the basis of personal face-to-face experience between two (or more) individuals without references made or being necessary to make to institutional arrangements. Guanxi contains different levels of relations between people, such as relations between immediate family members, relations between close friends or extended family members, or relations between non-family affiliates. Guanxi is mainly personal trust, but not purely is. For example, a manager of a big trust company has relations with multiple HNWIs, although there exists personal trust between them because they regularly go to the same golf club and have social eating, but when it comes to the decision for the HNWIs on whether or not invest into trust products of that trust company, the good reputation of that company might be an important factor. Therefore, the relation between the manager and the HNWIs also involves institutionalized trust. Institutionalized trust is “a form of individual or collective action that is constitutively embedded in the institutional environment in which a relationship is placed, building on favorable assumptions about the trustee’s future behavior.”62 Sociologists have argued that individuals will alienate each other with the complexity of the society, as the personal trust relationship among members of society might be replaced by institutionalized trust among social groups and individuals without kinship or other personal ties.63 Actors in a sparse network do not have many strong personal ties in the new formulated society.64 In a sparse network, institutionalized trust is essential for the efficient operation of a business. Institutional factors include “legal regulations, professional codes of conduct, corporate reputation, industrial standards, and other formal and informal norms of behaviour.”65 Individuals’ confidence/trust in the institutional mechanisms can be built through these factors.66 Since legal regulation is a factor of the institutional trust, legal certainty and clarification of the law might be one way to build institutionalized trust. As a form of social capital, institutionalized trust in law can be utilized by the actors within the network of an industry to enter into transactions. The clarification of the Chinese trust law regarding the location of ownership of trust property may reduce the

61

See Chap. 6. Bachmann and Inkpen (2013), p. 459. 63 Potter (2002), p. 182. 64 Potter (2002), p. 182. 65 Bachmann and Inkpen (2013), p. 460. 66 Luo and Yeh (2009), p. 122, Kramer and Tyler (1996). 62

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worries of potential investors (i.e. the risk of losing the ownership of trust property in the establishment of a trust). However, the clarification of the Chinese trust law should be supported by a certain degree of social trust from the citizens to the trust institutions, and by a clarification of the relevant laws and regulations (such as tax law and property registration system). As shown in the interviews conducted in this research, the potential investors hold a relatively low degree of trust in the trust companies. If the idea or scheme presented by the law is much deviated from what the citizens think, the law cannot function as expected by the legislators. Additionally, the process of the replacement of personal trust relationship by institutionalized trust is “partly” and “incrementally.” It is noted that with the complexity of the society, relationships like guanxi in China may play less important role in social actions, but it would be relatively slow to be replaced by institutionalized trust.

7.5.3

Facilitating Social Capital: Building Institutionalized Trust

Commercial trusts in China developed extremely rapidly in the past decade. The high level of embeddedness of the dense network surrounding the trust industry generates social trust among actors within the network. In other words, among other factors, social trust facilitated the establishment of trusts transactions in China. In the past decade, Chinese trust companies have shown little interest in developing family trust business, partly because of their focus on commercial trusts that offer a higher profit margin and partly because potential clients have yet to overcome the barrier in transferring their wealth to trust companies. However, after so many years, the concepts of asset management and trusts have already been accepted by Chinese people.67 Trust industry faces the transformation of business models, as explained in the sections above of this chapter. It is estimated that with the transformation comes a sparser network. It is recognized by sociologists that social capital influences how a network forms. Network formation proceeds through the establishment of new relationships, building on the base of existing ties. Managing these ties requires ongoing attention and resources, thus social capital is valuable for managing relationships because it constrains other actors to be more cooperative. Actors with less social capital are more vulnerable to opportunistic behavior and less able to build an enduring history of effective cooperative behavior with their partners over time. Therefore, they are required to expend greater time and effort monitoring the relationship. In contrast, the more social capital available to an actor, the fewer resources it needs to manage existing relationships and the more resources it can use to establish new ones.68 67

Ho (2014). Walker et al. (2013), pp. 176–177.

68

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The degree of social capital depends on the actor’s position in the network structure. The actors in network positions with higher social capital are likely to have more relationships with new partners in the following time period.69 Therefore, actors should try to increase the social capital available to them. In this respect, insights can be gained if we consider the roles that different nodes play in the structure of networks. In social networks, some nodes are positioned in the middle of a single group, while others are positioned at the interfaces between multiple groups. The interactions that the nodes sitting at the interfaces has with other actors are much riskier than the embedded interactions, but as structural holes in networks, these nodes confer some fundamental advantages.70 In this case, trust companies function as the structural holes in the network surrounding trust industry in China. Trust companies are linked with the institutions that need financing, and with the potential investors in the network. But there might be a gap between the demand of potential consumers of trust products and the supply of trust products. In light of this, it would be a possible solution for the problem regarding the location of the ownership of trust properties, if trust companies manage to build institutionalized trust through the new relationships with the potential consumers of trust products they establish over time. Only if consumers’ trust in trust companies reaches a certain degree, is the time ripe for the clarification of Chinese Trust Law.

7.6

Interim Conclusion

This Chapter explained the current business dilemma surrounding Chinese trusts. For one thing, the demand of the trusts in China is predictably increasing. Chinese HNWIs population generates great demand for investment products and assets management services. For the other thing, the trust industry is observed to be in its decline stage of the business life cycle. But, in order to avoid this decline and maintain a positive business life cycle, trust companies start to innovatively change their business model. This chapter predicted that the network of China trust business in the near future is likely to transform towards a sparser network. In a sparse network, actors are more likely to reserve their ownership rights rather than put themselves into risk, unless institutionalized trust is built between service providers and potential consumers. In a sparse network, institutionalized trust is essential for the efficient operation of a business. Legal certainty and clarification of the law might be one way to build institutionalized trust. As a form of social capital, institutionalized trust in law can be utilized by the actors within the network of an industry to enter into transactions.

69

Walker et al. (2013), p. 177. Easley and Kleinberg (2010), p. 60.

70

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7 The Chinese Trust Industry in the Near Future Towards a Sparse …

The clarification of the Chinese trust law regarding the location of ownership of trust property may reduce the worries of potential investors. However, it seems unlikely that institutionalized trust can be easily established by the clarification of the law alone. Therefore, this book addressed a possible justification of the openness of Chinese Trust Law regarding the location of the ownership of trust property. At the time when the trust law was drafted, it was estimated by the legislators that the potential consumers of trust products have very low degree of social trust in trust institutions. Furthermore, it is proposed in this chapter that the location of trust property ownership in Chinese Trust Law needs to be clarified at this stage, in order to build the institutionalized trust in the sparse network. But a further conclusion of this book is that Chinese trust companies would be obliged to build social trust from potential consumers over time. Only if consumers’ trust in trust companies reaches a certain degree, is the time ripe for the clarification of Chinese Trust Law.

References Bachmann R, Inkpen AC (2013) Understanding institutional-based trust building processes in inter-organizational relationships. In: Costa AC, Anderson N (eds) Trust and social capital in organizations (Vol II: trust in institutions: organizational and inter-organizational level trust). Sage, London, pp 455–481 Bain & Co., China Merchant Bank (2013) China private wealth report 2013. http://www.bain.com/ Images/2013_China_Wealth_Report.pdf. Accessed 6 May 6 2015 Bian Y (ed) (2002) Zhonghua renmin gongheguo xintuofa shiyi (Annotation of the trust law of the People’s Republic of China). Law Press China, Beijing China Trust Sector Reports Slower Growth; Default Risks in Focus (2014). http://www.cnbc.com/ id/101416270. Accessed 15 May 2015 China Trust ‘Timebomb’ Ticks as Credit Suisse Sees Rejig (2014). http://www.bloomberg.com/ news/articles/2014-07-03/china-trust-timebomb-ticks-as-credit-suisse-sees-rejig. Accessed 15 June 2015 China Trust Industry Growth to Slow by Half, Huabao Says (2013). http://www.bloomberg.com/ news/articles/2013-08-01/china-trust-industry-growth-to-slow-by-half-huabao-says. Accessed 23 June 2015 China Trust Asset Growth Slows in Shadow Banking Campaign (Bloomberg, 2014). http://www. bloomberg.com/news/articles/2014-08-12/china-s-trust-asset-growth-slows-amid-shadowbanking-crackdown. Accessed 11 May 2015 Chinese High Net Worth Individuals Shift Wealth Management Focus from Growing to Preserving Assets; Overseas Diversification on the Rise, Finds New China Private Wealth Report (2013). http://www.bain.com/about/press/press-releases/chinese-high-net-worthindividuals-shift-wealth-management-focus-from-growing-to-preserving-assets.aspx. Accessed 11 May 2015 Du P (2001) Jiang Ping chanshu “xintuo fa” baohan de baxiang jiben yuanze (Eight basic principles of trust law illustrated by Jiang Ping). http://www.chinalawinfo.com/News/ NewsFullText.aspx?NewsId=62961. Accessed 23 June 2015 Easley D, Kleinberg J (2010) Networks, crowds, and markets: reasoning about a highly connected world. CUP, Cambridge

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Forbes China and CreditEase, 2014 Zhongguo Dazong Fuyu Jieceng Caifu Baipishu (2014 Chinese Mass Affluent Report). http://www.forbeschina.com/upload/Bj9O8CwBlZ.pdf. Accessed 6 May 2015 Gao L (2014) The development of private trusts in mainland China: legal obstacles and solutions. Trusts Trustees 20(4):350–361 Greiner LE (1972) Evolution and revolution as organizations grow. Harvard Bus Rev 50(4):37–46 Hanks S, Pollack ME, Cohen PR (1993) Benchmarks, test beds, controlled experimentation and the design of agent architectures. AI Mag 14(4):17–42 He B (2005) Xintuofa yuanli yanjiu (Research on the principles of the trust law). China Legal Publishing House, Beijing Ho L (2012) Trust laws in China. In: Smith L (ed) Re-imaging the trust: trusts in civil law. CUP, New York, pp 183–221 Ho L (2014) Family trusts for Chinese clients. Trusts Trustees 20(1&2):93–97 Jiang P (2010) Chenfu yu kurong: bashi zishu (Ups and downs: a great scholar Jiang Ping’s account of his own life). Law Press China, Beijing Kramer RM, Tyler TR (eds) (1996) Trust in organizations: frontiers of theory and research. Sage, London Luo J-D, Yeh Y-C (2009) The transaction cost: embeddedness approach to studying Chinese outsourcing. In: Hsung R et al (eds) Contexts of social capital social: networks in markets, communities and families. Routledge, London, pp 115–138 Mayhew B, Levinger R (1976) On the emergence of oligarchy in human interaction. AJS 81:1017–1049 McKinsey (2014) Global Wealth Management Survey 2014: an attractive sector in transition. http://www.mckinsey.com/*/media/mckinsey%20offices/france/pdfs/global_wealth_ management_survey_2014.ashx. Accessed 29 Aug 2015 Penrose ET (1952) Biological analogies in the theory of the firm. Am Econ Rev 42(4):804–819 Penrose ET (1995) The theory of the growth of the firm. OUP, Oxford Ping’an Trust and McKinsey (2013) The coming transformation of China’s trust industry: China Trust Industry Report 2013. http://www.mckinseychina.com/wp-content/uploads/2013/12/ mckinsey-china-the-coming-transformation-of-chinas-trust-industry.pdf?5c8e08. Accessed 21 Feb 2015 Potter PB (2002) Guanxi and the PRC legal system: from contradiction to complementarity. In: Gold T et al (eds) Social connections in China. CUP, Cambridge, pp 179–195 Rogerson A (2010) Successfully start your business, expert advice from a business broker. Rogerson Business Services, Carmichael Rostow WW (1991) The stages of economic growth: a non-communist manifesto, 3rd edn. CUP, Cambridge Steinmetz LL (1969) Critical stages of small business growth. Bus Horiz 12(1):29 Tang W (2014) Analysis on the sustainable development of China trust industry. J Syst Manag Sci 4:1 The Boston Consulting Group and CCB Private Bank (2011) China wealth 2011—wealth markets in China: seeking the opportunity to lead. http://www.bcg.com.cn/en/files/publications/reports_ pdf/BCG_China_Wealth_2011_ENG_Final.pdf. Accessed 6 May 2015 Walker G, Kogut B, Shan W (2013) Social capital, structural holes and the formation of an industry network. In: Costa AC, Anderson N (eds) Social capital: organizational advantage and inter-organizational networks. Trust and social capital in organizations, vol 4. Sage, London, pp 173–200 Wildau et al (2013) China pilot scheme aims to shatter assumption; investments are not guaranteed. http://www.reuters.com/article/2013/10/10/us-china-banks-debt-idUSBRE99915D 20131010. Accessed 20 Apr 2016 Yuan Z (2014) 2014–2015 Xintuoye dongtai yu zanwang (Prospects of Chinese trust industry 2014–2015). http://econ.cssn.cn/jjx/xk/jjx_yyjjx/jjx_jrx/201504/t20150430_1717149.shtml. Accessed 17 June 2015

Chapter 8

Conclusion

Abstract This book submits that the network between active participants of Chinese trust business (including both the service providers and consumers) constitutes a dense network. The high embeddedness of dense network surrounding Chinese trust industry generates social trust between actors in the relevant society that allows the trust business to flourish. However, with the development of metropolitan areas in China, this book predicts that the network between the citizens and the wealth management service providers in China changes from dense network to sparse one. In this circumstance, Chinese trust business would be likely to adapt itself to a dense network through developing institutionalized trust. In a sparse network, actors in the network are more likely to reserve their ownership rights rather than put themselves into risk of losing the ownership of trust property, unless institutionalized trust is built between service providers and potential consumers. This book concludes that the clarification of the location of trust property ownership in Chinese Trust Law would become essential and also practicable. A further proposal of this book is that Chinese trust companies would be obliged to build social trust from potential consumers over time. Only if consumers’ trust in trust companies reaches a certain degree, is the time ripe for the clarification of Chinese Trust Law.

The location of ownership of trust property has been a heated debated issue among Chinese scholars since Chinese Trust Law was enacted in 2001. Almost every possible interpretation as to this issue has been represented by Chinese lawyers. Under the frustrating circumstances regarding this issue in China, this book conducted a comparative analysis on this issue (Chap. 3), after an introductory chapter (Chap. 1) and a description of the background of the enactment of Chinese trust law (Chap. 2). It described various conventional interpretations of Chinese Trust Law submitted by legal scholars, and compared the diverse approaches regarding the location of ownership of trust property provided by jurisdictions globally. As shown in Chap. 3, many civil law jurisdictions and so-called “mixed” jurisdictions paid much effort to develop explanations to “trust” because of the potential conflict between the understanding of property rights in those jurisdictions © Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2_8

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and the trust. It is widely considered that the ‘dual ownership’ concept is a key feature of common law trusts. The central element of the English trust is deemed to be that the trustee obtains legal ownership/title of trust property in the establishment of a trust, while beneficial ownership/title of trust property is transferred to the beneficiary. However, from the perspective of the lawyers and legal scholars who have very conventional concept of the ownership of property rights in civil law jurisdictions, the concept of trust is deemed being running counter of important tenets of civil law principles, particularly, the theory of “absolute ownership” principle. From the point of view of lawyers and legal scholars who insist the “absolute ownership” principle, the split of ownership of trust property between the trustee and the beneficiary is not understandable. Therefore, debates focus on the explanation of vesting the absolute ownership of trust property in one of the parties (settlor, trustee, or beneficiary) or even upon a separate entity. The conflict between the conventional understanding of property rights and the concept of trust may cause difficulties when introducing the trust law into legal system of the civil law or the “mixed” jurisdictions. In order to reduce any negative impact the concept of trust may have on indigenous civil law regimes, and also for the lawyers in civil law jurisdictions to understand the trust, it has been tried by legislators in various jurisdictions to solve the problem regarding the location of ownership of trust property through several approaches: (1) the settlor transfers (absolute) ownership of trust property to the trustee, while the trustee’s ownership is subject to certain restrictions set by the trust law and/or the terms of trust set by the settler, also, in some jurisdictions, assuring strong rights of beneficiary; (2) the settlor transfers ownership of trust assets to the beneficiary, while the beneficiary’s ownership is subject to the trustee’s powers of management of trust assets; or (3) the settlor transfers ownership of trust assets to a separate patrimony not owned by any person, but the patrimony’s ownership is subject to the trustee’s management powers of trust assets and the beneficiary’s correspondent rights of beneficiary enjoyment. The approaches outlined above are also supported by the recent consensus among legal scholars that the concept of “dual ownership” of trust property in the English trust is not an essential element of a trust. Increasingly, the literature agrees that the rights of a beneficiary under a trust were initially not considered as property rights. However, these rights evolved and came to be accepted as proprietary and finally, in some circumstances, as ownership rights. The “equitable ownership” in common law jurisdiction is functionally remedial right for the beneficiary of the trust. Therefore, when the trust is introduced into civilian and “mixed” jurisdictions, if other legal mechanisms could be developed to provide protection to the trust beneficiary instead of an “equitable ownership,” the ownership of trust assets can be solely vested in the trustee. Similarly, China is also facing the problem regarding the location of ownership of trust assets, which is left open by the Chinese trust law. The Chinese trust law neither mandates the settler of a trust to transfer the trust assets to the trustee, nor prohibits the transfer of trust property in creating a trust. This allows several possibilities in respect of the location of the ownership of trust property. In the existing

8 Conclusion

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studies on trust property rights in China, almost every possibility has been interpreted by lawyers and legal scholars. Generally, the followings are prevalent: (1) ownership of trust assets is transferred to the trustee by the settlor when establishing a trust; (2) ownership of trust assets remains with the settlor even after the establishment of a trust. It is noted that the settlor’s retention of trust property ownership is quite different from the approaches adopted by other civil law jurisdictions; (3) ownership of trust assets is with the beneficiaries upon the creation of a trust; (4) titular ownership of trust property is with the trustee, substantive ownership of trust property is with the settlor and beneficiaries upon the establishment of a trust; (5) ownership of trust assets is with either the settlor or the trustee depending on whether the settlor had transferred ownership of trust property to the trustee. However, one important point that is rarely taken into consideration by trust law scholars is the practice of the trust business itself and the ever-changing social and economic context surrounding it. Studying the attitudes and behavior of the stakeholders in the trust business might be one way to understand the issue regarding the location of trust property ownership beyond the ambits of abstract principles. In light of this, instead of trying to directly answer the question “who is the owner of trust property in China?”, this book developed a new perspective, namely a social capital perspective, to explain the uncertainty of Chinese Trust Law, and to answer the question as to “what facilitate the thriving Chinese trust industry in spite of the ambiguity of the Trust Law?” Moreover, this book illustrates how the social conditions affect the draft of a provision of law. The law should not be much deviated from the social conditions, rather, the law has to have compatibility or interface with the existing social conditions, while reserving room for future development or, at least, adjustment thereof. Through a number of sociological concepts - particularly social capital, social trust, and social network - this book outlined the structure of the society surrounding the Chinese trust business in different stages, i.e. the stage before the enactment of the Chinese Trust Law, the current rapid develop stage, and the potential transformation stage in the near future. It focused on how specific structural features of Chinese trust industry social network affect the behavior of actors within it. Social scientists have offered a number of definitions of social capital. While they are broadly similar, they talk in the same context. According to the explanations outlined in Chap. 4, there are important differences of perspective between the three most well-known scholars (Bourdieu, Coleman, and Putnam). In brief, Bourdieu shows a concern with questions of unequal access to resources and the maintenance of power; Coleman takes as his starting point the idea of individuals acting rationally in pursuit of their own interests; Putnam has inherited and developed the idea of association and civic activity as the basis of social integration and well-being. Despite the differences, all three consider that social capital consists of personal connections and interpersonal interaction, together with the shared sets of values that are associated with these contacts.

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The research from the perspective of social capital and trust suggests that trust has substantial value in establishing commercial relationship between businesses and consumers. Social trust is defined by Coleman and Putman as a key component of social capital. Francis Fukuyama even goes further, defining trust as a basic source of social capital. In order of people to cooperate to achieve their goals, they need to trust one another, and expect that if they cooperate, they will not be exploited or defrauded, but can at some time or other expect to benefit similarly in return. Contemporary researches on social capital are always linked to social networks. Research on social capital from a social networks perspective tends to focus on how certain structural features of the social network, for example weak, bridging ties or strong ties and dense structures, correspond to a variety of different outcome variables. The network plays an important role in building and maintaining social capital. Guanxi, as a distinctive social phenomanon in China, means at heart that networks play an important role in Chinese social life. This notion is relevant to the concepts of social capital and trust because the main book of the latter is applicable to guanxi network. The concepts discussed above shed lights on the legal debate regarding ownership of trust assets in China. To qualitatively outline the structure of Chinese trust business society, the data was collected through an empirical study of Chinese trust industry, specifically through two sorts of sources: (a) statistical data from industrial reports, and (b) targeted in-depth interviews. As described in Chap. 5, the references of statistical data in this book is mainly the data released by China Trustee Association, and reports issued by some big Chinese trust companies and professional consulting companies. Meanwhile, the interviews were conducted from Feb. 18, 2014 to March 8, 2014, with 5 interviewees in Beijing and 2 interviewees in Zhengzhou visited. The language used in the interviews is Chinese. The average length of the interviews was an hour and a half. Through the empirical research, this book showed several selected findings: (1) Chinese new middle-class citizens show great willingness to invest into real estate market; (2) High net worth individuals in China are frustrated to utilize domestic wealth management service providers; (3) High degree of mutual trust between clients and commercial banks in China; (4) Role of guanxi in China’s trust business; (5) Lack/Low level of trust of new middle-class towards Trustees; (6) The trust business in China has been thriving since 2007; (7) Nascent transformation of China’s trust business model. As observed in Chap. 6, China commercial trust industry has been thriving over the past decades. Trust companies in China today are primarily engaged in two businesses: a private placement business and a conduit business. In this book, China trust business is deemed to be activities among relatively small group of people or institutions. The network of such trust business is submitted to be a dense network. The following factors provide evidences for this assumption: (1) Single trusts constitute a large percentage of trust business; (2) Trust companies rely on Commercial banks for client referrals; (3) Guanxi plays a role in relationship marketing of trust products; (4) Ownership concentration of China trust companies is high.

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In the dense network of Chinese trust industry, guanxi and some personal relations can be utilized by the actors within the network to achieve cooperation, or specifically, to promote the establishment of a trust transaction between the asset management service providers and the investors. Trust companies in China relied heavily on their managers’ guanxi network to build the customer base. Because of the relatively high degree of mutual trust between the actors within China trusts dense network, people are willing to transfer the trust property to the trustees, placing themselves at risk of losing ownership of trust assets. From a social network perspective, another reason for the growth of China trust industry is connected to so-called “network effects”. Network effects can work in both active and negative ways. Since 2014, there are more trust default cases happening in China, although some of them are avoided in undisclosed ways. Under this circumstance, network effects would work to decrease the consumer confidence of the trust products. Finally, the final Chapter explained the current business dilemma surrounding Chinese trusts. For one thing, the demand of the trusts in China is predictably increasing. Chinese HNWIs population generates great demand for investment products and assets management services. For the other thing, the trust industry is observed to be in its decline stage of the business life cycle. But, in order to avoid this decline and maintain a positive business life cycle, trust companies start to innovatively change their business model. With this transformation, the problem caused by the ambiguous regulation of Chinese trust law regarding the ownership of trust property might occur. This book predicted that the network of China trust business in the near future is likely to transform towards a sparser network. In a sparse network, actors are more likely to reserve their ownership rights rather than put themselves into risk, unless institutionalized trust is built between service providers and potential consumers. In a sparse network, institutionalized trust is essential for the efficient operation of a business. An important way to build institutionalized trust might be the clarification of the law. In the potential sparse network of Chinese trust industry, a clear provision about the location of ownership of trust property may reduce the concerns of potential consumers. However, the process of the replacement of personal trust relationship by institutionalized trust is “partial” and “incremental”. It is noted that with the ever-increasing complexity of society, relationships like guanxi in China may play a less important role in social actions, but it will be relatively slow to be replaced by institutionalized forms of trust. On the other hand, if the Chinese institutionalized trust reaches a considerably high degree, China may decide to nominate the trustee as the sole owner of the trust property, while giving very strong but creditor’s right to the beneficiary. Additionally, as the author observed, one of the factors that lead to the lack of Chinese trust registration rule is tightly linked to the problem concerning the location of ownership of trust property. The rule makers may feel frustrated in drafting the registration rule for trust, because they need to decide which party (the settlor, the trustee, or the beneficiary) holds the ownership of trust property. However, it is not easy to justify each of the options for the location of the

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ownership of trust property in China. If, with the increase in the degree of institutionalized trust in China, the trustee is nominated as the sole owner of the trust property, the trust registration will not be problematic any more. Therefore, this book addressed a possible justification of the openness of Chinese Trust Law regarding the location of the ownership of trust property. At the time when the trust law was drafted, it was estimated by the legislators that the potential consumers of trust products have very low degree of social trust in trust institutions. Furthermore, it is proposed in this book that the location of trust property ownership in Chinese Trust Law needs to be clarified at this stage, in order to build the institutionalized trust in the sparse network. But a further conclusion of this book is that Chinese trust companies would be obliged to build social trust from potential consumers over time. Only if consumers’ trust in trust companies reaches a certain degree, is the time ripe for the clarification of Chinese Trust Law.

Appendix A

List of Sample Interview Questions

A. For Ordinary Citizens 1. What kind of assets do you have (cash, house, car, stocks, etc.)? What is the size of respective assets? What is your personal value of respective kinds of assets? 2. Do you save your cash in banks? How many percentages of your assets does your bank account take? Do you have other means to save cash (i.e., other kinds of deposit account)? • If yes, do you want to use it through means with higher risk and/or higher return? • If not, where do you invest your cash in addition to bank deposit? 3. Do you manage your assets by yourself? • If yes, which type of assets do you manage by yourself? For this kind of assets, would you like to utilize a service provided by specialized persons or institutions? Why by yourself? Why not utilize servicers or financial institutions? • If not, which type of services are you utilizing for assets management? How is the size, and what kinds of assets do you invest into assets management institutions? 4. Are you willing to contract, deposit, or use your assets in the name of your manager or service provider? • If yes, is there any condition for the manager? Do you still want to keep sort of control of your assets (such as license, regulation by law, etc.)? • If not, what are your main concerns? • What if the assets are separate from your manager’s own assets although in his/her name (such as bankruptcy remote from your manager or service provider)? 5. In which condition would you like to choose a service of assets management? 6. What are the purposes for you to utilize a service of assets (Apartment, securities, etc.) management?

© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2

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Appendix A: List of Sample Interview Questions

B. For Practitioners of Trust Business 1. What types of trust business are most widely used in China? 2. Who are the main consumers of Chinese trusts? Do you think the group of trust consumers is growing? 3. Which institutions are running trust business in China? Do you think the scale and number of trust business institutions is increasing? 4. Usually local governments are ones of the shareholders of trust companies, what role does the local government play in the business? 5. What role does the financial supervision department play in the trust business in China? 6. How do the trust business institutions communicate with or influence each other? What role does China Trustee Association play? 7. What are the problems of the current models of trust business? What is the direction of the development of trust business? 8. How do you think the laws and regulations function in the trust business practice? In the absence of legal certainty in some respects, do practitioners have common understandings of the way in which problems are solved in the practice? 9. To what extent you are dealing with the same people/prior experience? 10. What is the role of personal connections (guanxi) in doing trust business in your experience?

Appendix B

List of Interviewees

No.

Gender

Age

Position

City

Education

Visiting date

1.

Male

30

Beijing

Ph.D. of Law

Feb. 20, 2014

2.

Male

60

Beijing

High school

Feb. 22, 2014

3.

Male

38

Beijing

Master of engineering

Feb. 23, 2014

4.

Male

50

Beijing

Bachelor of economics

Feb. 24, 2014

5.

Male

33

Beijing

LL.M.

Feb. 26, 2014

6.

Male

45

Zhengzhou

7.

Male

46

Staff (potential manager) in the Legal and Compliance Department, Zhongxin International Trust Co., Ltd. CEO, Beijing Liangzhuo Yexing Decoration Engineering Co., Ltd. Beijing Aevospace Xingda Science and Technology Co., Ltd. Senior Manager in the Marketing Department, Pall Corporation Junior Manager in the Marketing Department, Zhongrong International Trust Co., Ltd. Partner, Henan Huizhi Yuance Law Firm Senior Manager in the Private Banking Department, Bank of China (Branch of Hennan)

Bachelor of finance Bachelor of finance

March 2, 2014 March 5, 2014

Zhengzhou

© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2

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Appendix C

Selected Inquiries and Answers in the Interviews

Question 1: Which types of assets/property do you have (e.g. real estate, stocks, cars)? What is the size of your respective assets? Answer 1

Answer 2

Answer 3

Actually, I have very few types of assets, namely, cash, apartments, cars, stocks, and gold. Cash and apartments constitute a major portion of my total assets. I bought two apartments in Beijing and one in my hometown, the price of which in total is approximately CNY 12 million (around USD 2 million). Several years ago, I invested in stocks, funds and gold, but now I sold most of them after great losses in each market. The reason why I bought apartments is that the price of real estate increases dramatically in recent years and there is a prospect that the price will continue to go up in the near future. In big cities like Beijing, the best way to invest is to buy houses or apartments. I am not interested in how to make money by managing my apartments, instead, to own an apartment itself is to make money. In addition, possessing and controlling the house by myself makes me feel more comfortable than entrusting anybody else or any agency. Most of my cash was invested into real estate, such as apartments and commercial buildings. Nowadays, I estimate that, for Chinese citizens, more than 50% of their investment goes to real estate market. We spent a lot in buying cars and apartments. The price of apartments is increasing rapidly in recent years in China. Most of the cash in my family is invested into higher return financial products rather than being deposited in banks.

Question 2: Which type of services are you utilizing for assets management? Answer 1

The domestic channel of investment in China is relatively narrow. I am always looking for financial products with higher return because of the increasing inflation and decreasing rate of bank deposit. In foreign countries, the multiple and diverse channels for investment make wealth and investment management consulting necessary for ordinary

© Springer Nature Singapore Pte Ltd. 2017 Z. Meng, Ownership of Trust Property in China, Perspectives in Law, Business and Innovation, DOI 10.1007/978-981-10-5846-2

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Answer 2

Answer 3

Appendix C: Selected Inquiries and Answers in the Interviews

citizens. People in China don’t have many options to invest. The most invested markets in China are real estate, stocks, gold, and foreign exchange market. First of all, stock market is not a proper field to invest for ordinary people. It is very difficult to predict the stock market’s trend. Several years ago, stock market was appealing to ordinary citizens because of the dramatic rise of stock indexes. But in recent years, like many of my friends who invest in stocks, I lost quite a large sum of money in stock market. Secondly, bonds are considered to be of low risk, but sometimes the return cannot be assured. And the lack of liquidity makes bonds less attractive to me. Thirdly, the return rate of wealth management products in banks is relatively low. I prefer short-term financial products, because I don’t have confidence to put my money for a long period of time in any financial institutions for investment. Most asset management firms in China are not able to provide professional management consulting service. It would be problematic if the manager defaults or the assets are claimed by the manager’s creditors. In reality, default of the financial institutions does happen from time to time. In terms of apartments, I definitely want to control it by myself, because I do not want to lose my most valuable assets.

Question 3: Which financial institution do you think occupies the biggest market share of asset management in China? Answer 1

Answer 2

The main players in China’s wealth management industry are still the commercial banks, given their networks and therefore advantage in acquiring customers. I expect the banks to continue to be dominant, especially as they enhance their capabilities, product range and offshore platforms, such as platforms in Hong Kong. I am not an aggressive investor, I prefer to buy products with lower risk. I used to buy stocks, funds, government bonds, insurance, and gold, but now I only invest money in wealth management products in banks. Usually I choose to buy short-term products (e.g., 2, 3, 6 months) with medium interest rate (i.e., 5–7%). The only financial institutions in China you can trust are banks. Banks could somehow find ways to make sure that the investors get the return of their investment, preventing the reputation of banks from damaged.

Question 4: What is the role of personal connections (guanxi) in doing trust business in your experience? Answer

The Chinese regulatory authority does not allow the financial institutions to propagandize their trust products to ordinary citizens, because trust products are of high risk, citizens are not encouraged to take the risk in

Appendix C: Selected Inquiries and Answers in the Interviews

171

blind. Managers of trust companies or wealth management department of banks are required to have connection with upper-class citizens. On the other hand, institutional investors accounted for larger portion of the overall trust products investors than individual investors. Institutions which need financing through trust projects always make use of their managers’ connections to access to the trust company. Question 5: In which condition would you like to purchase trust products? Answer 1

Answer 2

Answer 3

Although the return of trust products is higher, I am still hesitated to invest into them. The high interest rate means that trust products are with high risk. The average interest rate of trust products is above 10%, even up to 15%. Additionally, the lowest amount of investment in trusts is CNY 1 million, which indicates trusts market is a game among wealthy people who can take high risks. My wife works in a security company, so we have a certain degree of knowledge about investment. We rarely invest into trust products, because trust products have many disadvantages, for example, lack of information transparency, inflexible in transferring beneficiary’s rights. But this time the reason why we invested into trust products is that this trust product is issued by my wife’s security company. After our assessment of this product, we believe that the risk is not very high. I seldom invest into high risk financial products, and even don’t know what trust product is. Recently I am interested into trust products because my colleagues at work are talking about it. Some colleagues got stable interest return every year, and the rate of return is much higher than other investment ways (such as deposits, bonds, gold, and stocks.) Our company even initiated a collective fund, collecting small size of idle funds from employees, and then invested the collective fund into trust products.