Trusts as Institutions in China's Financial Markets

• Author: Eric Linge
• Pages: 284-312

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284 TSINGHUA CHINA LAW REVIEW [Vol. 3:283

TRUSTS AS INSTITUTIONS IN CHINA’S FINANCIAL

MARKETS

Eric Linge*

Abstract

China passed a law of trusts in 2001 intending it to be useful to financial market participants.

Drawing heavily from literature on economic institutions and economic development, this

article assesses the potential success of the trust’s becoming institutionalized in China. The

conclusion is that a legislature’s passing of a trust law does not alone make the trust an

institution. A law is not an institution until it functions to predictably incentivize and

constrain human behavior. A number of provisions in China’s Trust Law are unclear, and

this prevents the law from functioning with predictability. Further, there is some question

whether conditions in China are hospitable to the institutionalization of the trust, and whether

the Trust Law can be a catalyst for the development of financial markets.

I. INTRODUCTION

Individuals in England first created the legal arrangement called

the trust and the rest of the world has since discovered the

institution’s usefulness. While it was individuals who first

conceived of the idea, it took the blessing of the English courts of

equity to let it stand as a formal legal institution. The United

States’ legal system long ago inherited the trust with the rest of the

English common law, so that nowadays, trust law is often deemed a

product of Anglo-American law. The trust is an institution

constituted by a standardized bundle of legal rules arranging the in

personam and in rem rights and duties of the parties inside the trust

arrangement with respect to some trust property. In the

arrangement, the settlor, an owner of some certain property, transfers

that property to someone he considers trustworthy, a trustee; that

trustworthy individual then manages it and makes distributions to a

third party, called the beneficiary or beneficiaries. The arrangement

was originally used in England to circumvent feudal inheritance laws

and can still be used today to circumvent undesirable laws, like laws

of taxation.1 Since its inception the arrangement has proven a

useful means for a property owner to exploit another party’s

comparative advantage in property management. Throughout

history, individuals in other cultures have created arrangements

* Eric Linge, B.Journalism, 2004, University of Missouri; LL.M., 2009, National University of

Singapore; M.B.A., 2010, Carnegie Mellon University; J.D., 2010, University of Pittsburgh.

1 See GEORGE T. BOGERT ET AL., BOGERT’S TRUSTS AND TRUSTEES § 2 (3d ed. 2009); Henry

Hansmann & Ugo Mattei, The Functions of Trust Law: A Comparative Legal and Economic Analysis,

73 N.Y.U.L. REV. 434, 439-40, 446-47 (1998).

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similar to the trust, including the so-called “lineage trust,” or tang

(堂) in pre-communist China,2 but only the Anglo-American trust

has been so widely and successfully exported. Today the Anglo-

American trust is incorporated into the modern, formal legal systems

of many countries, even countries outside of the common law

tradition, like China.

In passing the Trust Law of the People’s Republic of China3

(hereinafter “Trust Law”), the Chinese legislature was quite self-

conscious in its decision to attempt a transplant4 of the Anglo-

American trust into its formal legal system. Observing how the

modern trust plays an important role in other countries’ financial

markets, the Chinese legislature hoped the trust could grow to also

play an equally important role in the Chinese financial markets.5

The trust in the modern U.S. and U.K. has become a widely used

organizational form for some types of institutional investors. 6

Institutional investors have become very important to the stability

and efficiency of financial markets in the U.S. and the U.K.

Believing the development of the institutional investor sector to be a

means of infusing the Chinese financial markets with stronger

liquidity, rationality, stability, and efficiency, 7 the Chinese

legislature passed the Trust Law as a catalyst for the rise of

institutional investment funds.

The trust’s role in financial markets extends beyond merely

providing an organizational form for some types of institutional

investors. The trust is also an organizational form for the

management of household wealth. When the trust form was first

created, it provided a means for landowners to manage their

ownership of real property. Since then financial assets have

become a larger and larger component of household wealth in the

2 See DAVID FAURE, CHINA AND CAPITALISM: A HISTORY OF BUSINESS ENTERPRISE IN MODERN

CHINA 37-40 (2006); Madeleine Zelin, Informal Law and the Firm in Early Modern China (Feb. 23-24,

2007) (unpublished conference article) (on file with the University of South California), available at

http://www.usc.edu/schools/college/crcc/private/ierc/conference_registration/papers/Zelin.pdf.

3 See Xintuo Fa (信托法) [Trust Law] (promulgated by the Standing Comm. Nat’l People’s Cong.,

Apr. 28, 2001, effective Oct. 1, 2001) 2001 STANDING COMM. NAT’L PEOPLE’S CONG. GAZ. 311.

4 Alan Watson famously popularized the concept of the legal transplant, which he described as “the

moving of a rule or a system of law from one country to another, or from one people to another.” ALAN

WATSON, LEGAL TRANSPLANTS: AN APPROACH TO COMPARATIVE LAW 21 (1974).

5 LUSINA HO, TRUST LAW IN CHINA 10 (2003) (H.K.); Charles Zhen Qu, The Doctrinal Basis of

the Trust Principles in China’s Trust Law, 38 REAL PROP. PROB. & TR. J. 345, 348-53 (2003).

6 John Langbein, Secret Life of the Trust: The Trust as an Instrument of Commerce, 107 YALE L.J.

165 (1997). See also A. Joseph Warburton, Should Mutual Funds Be Corporations? A Legal &

Econometric Analysis, 33 J. CORP. L. 745, 764-73 (2008).

7 The financial markets are so far lacking in these characteristics. See Benjamin Liebman & Curtis

Milhaupt, Reputational Sanctions in China’s Securities Market, 108 COLUM. L. REV. 929, 934-40

(2008). See also BARRY NAUGHTON, THE CHINESE ECONOMY: TRANSITIONS AND GROWTH 19 (2007).