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

Meng, Zhen

doi:10.1007/978-981-10-5846-2_2

Zhen Meng³

Part of the book series: Perspectives in Law, Business and Innovation ((PLBI))

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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.

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Notes

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.
4.
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.
13.
Reference to the interviews the author conducted with Chinese citizens, as explained in Chap. 5.
14.
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).
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_Sj9CPykssy0xPLMnMz0vMAfGjzOI9w8zcLULdQoM9XV1MDRxNXL283H09DE3MjPQLsh0VAc0LKs8!/.
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 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).
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.
37.
Gebhardt and Hanisch (2002), p. 2.
38.
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.
44.
Hansmann and Mattei (1998).
45.
Zhou (2002), p. 293.
46.
Zhou (2002), p. 295.
47.
Jiang and Zhou (1994), p. 54.
48.
Jiang and Zhou (1994), p. 54.
49.
Gebhardt and Hanisch (2002), p. 2.
50.
Gebhardt and Hanisch (2002), p. 1.
51.
Bian (2002).
52.
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.
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).
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.
67.
See Pettit (1997), Riddall (1999).
68.
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.
70.
Andersen and Bloom (2012).
71.
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.
74.
For the explanation of institutionalized trust, see Chap. 4.
75.
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).
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:
1. (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;
2. (ii)
  trustees to administer and manage the assets for the benefit of a beneficiary or, in the case of charitable trusts, a beneficial purpose;
3. (iii)
  a defined purpose other than the benefit of the trustee;
4. (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;
5. (v)
  legal title of ownership vested in the trustee8;
6. (vi)
  equitable or beneficial ownership vested in the beneficiary, with the right of tracing the assets in the hands of third parties;
7. (vii)
  intentional trusts can be oral or even secret;
8. (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;
9. (ix)
  as the assets settled on trust are out of circulation, trusts cannot exist in perpetuity except charitable trusts so authorised by the State;
10. (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.
83.
Banakas (2006).
84.
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.
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).
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).
92.
Chongqing High People’s Court First Instance Civil Case No. 14 (2006).

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

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Meng, Z. (2017). Trust Law of China and Its Uncertainty Regarding the Location of Ownership of Trust Property. In: Ownership of Trust Property in China . Perspectives in Law, Business and Innovation. Springer, Singapore. https://doi.org/10.1007/978-981-10-5846-2_2

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