China is to issue new rules to strengthen management of real estate trust products.

The sector is a fast-developing business in China because there is a realty boom.

The China Banking Regulatory Commission (CBRC) published the draft of the real estate trust rules on its website for public consultation Monday. The consultation period will last for a month.

The draft says trust companies will have to shoulder losses for investors that are directly caused by fraud or cheating in promotion and selling of real estate trust products.

With around a 15 billion yuan (US$1.8 billion) volume of real estate trusts, China is badly in need of a comprehensive regulation to enhance supervision in the sector.

Such products are gaining popularity among real estate developers, who are haunted by tightened loan supply as authorities last year pledged to cool down the real estate market and pop its bubbles.

Statistics indicate that more than 100 real estate trusts were launched in China during 2003 and up to June this year about a third of the trust products issued during the period.

But the growth in the sector also requires better risk control and discipline of the companies to guarantee that investors are well protected, experts say.

The draft of the new regulation defines the scope of business and qualifications for those undertaking real estate trusts, how the funds raised should be used and the liabilities of the relevant participants.

Such products have to have clear investment targets, strategies and risk control measures. And they have to be kept in the custody of a commercial bank, who will report to the CBRC about the use of the funds or any suspected irregularities, the draft said.

"The trust firms have to protect the interests of the entrusted parties and beneficiaries to the utmost," it said.

Money raised from real estate trust projects can not be used for non-real estate sectors, overseas real estate or other unrelated businesses or individuals. The entrusted assets must be clearly separated from other assets.

Apart from real estate products, China's trust firms, in strong recovery after years of cleaning up the market since the mid-90s, are facing a slew of new rules that set new standards in the business.

The CBRC is also to release rules on information disclosure for the trust firms, a commission spokesman said. These would enable investors to ask for compensation via lawsuits if they suffered from losses in investment which were the fault of the trust firms.

(China Daily October 19, 2004)