Sichuan protest raises fears for China’s $3tn trust sector
‘We are seeing the bursting of a bubble that has been under pressure for many years’
A ‘trust of trust’ holds multiple single-purpose trusts, each channelling money to a variety of projects in sectors such as real estate, infrastructure and manufacturing
Strains are emerging across China’s Rmb21tn ($3tn) trust industry, which has lured millions of ordinary investors seeking more profitable — but riskier — places to park their cash. Dozens of disgruntled Chinese investors protested this week in Chengdu, capital of the southwestern province of Sichuan, after Sichuan Trust, based in the city, said the firm would struggle to make principal and interest payments on at least Rmb13bn worth of “trust of trust” vehicles due by the end of the year. The incident highlights growing stresses faced by China’s financial system as the coronavirus crisis exposes weak points in the world’s second-largest economy. Trust products have become a key part of the shadow banking industry, supplying funds for companies and projects that find it hard to get bank loans, while offering investors returns that stand well above rates available on regular bank deposits. The Sichuan incident points “to systemic risks down the road,” said Zhuang Bo, an analyst at TS Lombard. Yu Zhi, an analyst at consultancy Yanglee, said: “We are seeing the bursting of a bubble that has been under pressure for many years.”
A trust of trust is a pooled investment fund that holds multiple single-purpose trusts, each channelling money to a variety of projects in sectors such as real estate, infrastructure and manufacturing. Sales of such products are generally limited to wealthy individuals: minimum investments tend to start at Rmb1m, though Sichuan Trust lowered the bar to Rmb300,000. But thanks to thin disclosure requirements on the vehicles’ underlying assets, trust companies are often able to issue new products to offset losses incurred by old ones, said Mr Yu of Yanglee. As such, he said, the arrangement “works on the belief that new investors will bail out the old ones.” Trust of trusts have performed well in recent years: multiple Sichuan Trust investors told the Financial Times that they had no trouble getting their principal and as much as 10 per cent interest back. But things turned around in April, when the provincial banking and insurance regulator restricted new sales of trusts of trusts, saying it suspected misuse of funds. That made it hard for Sichuan Trust to maintain payouts and meet redemption requests. In a June 12 meeting with investors, Kong Weiwen, a director at Sichuan Trust, said that the main reason for the firm’s financial trouble was the regulatory crackdown, according to a recording of the meeting seen by the FT. That has wrongfooted investors, some of whom told the FT that they had expected that Sichuan Trust would continue to make investors whole.
Liu Canglong, the majority shareholder of Sichuan Trust, is a former deputy chairman of the All-China Federation of Industry and Commerce, a government-backed body, and a former member of the Chinese People’s Political Consultative Conference. Both titles give him access to senior officials in Sichuan province and the central government. “There is a belief that politically well-connected Sichuan Trust has provided an implicit guarantee for their products — even though the prospectus mentioned investment risks,” said one investor. Zhou Shan, a director at Sichuan Provincial Banking and Insurance Regulatory Bureau, said that Sichuan Trust had “kept the use of trust proceeds a secret through complex insider transactions,” according to a video of a recent meeting with investors seen by the FT. Sichuan Trust declined to comment for this article. It issued a statement on Wednesday saying the April suspension had put “unprecedented pressure on every member of the firm.” It promised to “make utmost efforts to make sure clients have a satisfactory result within a year”. The crackdown has led to a “liquidity crisis” at Sichuan Trust, Liu Jingfeng, the firm’s president, told the investor meeting last week. He blamed a plunge in the value of the products’ underlying assets amid the economic downturn. Recommended FTfm Financial wizardry breathes magic into private equity returns
Analysts say there is no easy fix. While management told investors that the firm planned to sell its office building and equity stakes to raise capital, some are not convinced. Frank Wu, a Chengdu-based investor who holds more than Rmb10m worth of troubled trust of trust products, said the firm’s building was worth a fraction of its debt obligation. What annoys him the most, however, is the failure by Sichuan Trust to keep investors informed. “I had no idea where the money would end up and what risks the investment might incur when I bought the products,” said Mr Wu. “Now, I still don’t know how many underlying assets remain and how much they are worth.” The problems come as fears of defaults mount elsewhere in China, after years of rapid credit growth. Beijing bailed out three ailing banks last year and several other lenders have reported spikes in customer withdrawals over the past 12 months. “Financial failure has become a fact of life in China and you don’t know which institution will go under next,” said Larry Hu, an economist at Macquarie Group in Hong Kong.