CHENGDU, China (`) — Some investors in a troubled trust fund in China are facing financial ruin because of a government plan to return a fraction of their money, victims of a slump in the real estate industry and an overall economic slowdown.
Sichuan Trust, headquartered in the southwestern city of Chengdu, declared bankruptcy in 2020, citing poor accounting and failed investments in shopping malls and other projects. The deadline set earlier this month to accept a “haircut” or loss of 20% to 60% on their investments has left some investors in deep financial trouble, according to public announcements and ` interviews with five people affected.
China's economy, the world's second-largest, relies heavily on real estate development to spur growth and create jobs. Property prices and sales have fallen following a crackdown on borrowing that leaders have deemed dangerous Dozens from developer default on their debts.
At the National People's Congress At a meeting in Beijing last week, officials pledged to do more to protect investors. Premier Li Qiang said China will work to control risks and resolve the housing crisis.
It is probably too late for people who are pouring their savings into Sichuan Trust and similar institutions. About 300 of more than 8,000 investors refused to accept a government plan and sought legal help, a relative of one investor said. Some who tried to come to Beijing during the congress to air their grievances were prevented from doing so by police, the relative said.
The ruling Communist Party faces a dilemma: debt is a problem, but falling property prices are causing people to save on purchases. This causes companies' sales to shrink, forcing them to lay off workers and cut investments. The result: slower growth and less prosperity.
If China's debt crisis eases, someone is bound to lose, said Michael Pettis, a finance professor at Tsinghua University.
“Nobody wants to absorb the loss. If you allocate it to households, you weaken consumption even more,” Pettis said. “It has to be assigned. And that is the political problem.”
Trusts are a cross between a bank and an investment fund. Some advertised their offerings as reliable, high-interest, government-backed accounts. They are actually private entities that finance projects such as factories and shopping centers. Weak disclosure requirements allowed them to use new investors' money to pay off previous debts, a scheme that resembled a Ponzi scheme.
“In the past, financial supervision was relatively loose, so the design of these products, including systems to protect investors' rights and interests, had serious problems,” said Zhu Zhenxin, chief analyst at Rushi Finance Institute in Beijing. “If the underlying assets of financial products do not generate enough return to pay such high interest rates, default is inevitable.”
Sichuan Trust's problems first came to light when the government began restricting new sales of trust products in 2020. Without income from new investors, the company could not pay its outstanding debts.
This summer, Sichuan Trust announced that it had 25.3 billion RMB (then $3.5 billion) in debt that it could not repay. The provincial government and banking regulators took control, fired management, reorganized its books and launched an investigation.
Hundreds of investors protested weekly outside the company's headquarters and their losses became a political issue.
In 2021, police arrested Sichuan Trust's majority shareholder Liu Canglong, a mining and real estate tycoon and once the richest man in Sichuan, a province of more than 80 million people. He is accused of embezzling trust funds.
In December, the trust announced it would return investors' funds on a sliding scale of the original investment. The larger the investment share, the greater the loss.
This sparked further protests.
“We are extremely concerned,” an investor who asked not to be identified told The `. “It’s so cruel, the amount of money they give us is so small.”
A person who responded to Sichuan Trust's hotline said the company was not accepting interviews and would not comment. Sichuan Trust, the Sichuan provincial government and the China Banking and Insurance Regulatory Commission did not respond to faxed and emailed requests for comment.
The fund return plan “appropriately favors small and medium-sized investors,” Sichuan Trust previously said in a public statement, calling it “fair.”
Those protesting out of fear say they have been harassed and intimidated, subjected to police interrogations and threats from their children's employers. They were prohibited from leaving Chengdu or their residential complexes temporarily.
During a recent visit to the company's headquarters, dozens of uniformed officers, a half-dozen police vehicles and an empty bus were parked outside. More than a dozen plainclothes agents who refused to identify themselves followed two ` journalists.
Previously was a Dutch journalist pushed to the ground and was forced into a police vehicle as he attempted to approach protesting investors.
“They kidnap you, they threaten your children,” said another investor, who also did not want to be named for fear of further police harassment. “They have so many dirty tricks.”
Analysts say investors would certainly suffer big losses given the size of Sichuan Trust's debt. Chinese media have reported on the issue, but have focused on alleged misconduct by the trust's operators and portrayed the repayment plan as a fair solution.
Some of the more than 95% of investors who agreed to the plan said they agreed under duress and were threatened with greater losses if they failed to meet the March 5 deadline.
Trusts have a high minimum investment – Sichuan Trust's was generally 300,000 yuan ($42,000) – and many people believed the relatively wealthy were particularly affected.
However, some investors were retirees who said they had reached the investment threshold by raising money from friends and relatives who now wanted their money back. For them, Sichuan Trust's default is a catastrophe.
“They are so poor that they have no money to spend,” said a relative of investors who lost money to the trust. “They have no money for medical treatment. They have to borrow money to survive.”
Respondents said the name Sichuan Trust led them to believe it was a trustworthy financial institution such as a bank with stable, fixed interest rates, rather than a risky investment fund. They were attracted by the promised interest rates of 8% or 9%, several times higher than traditional savings accounts. Some financially unsophisticated retirees invested large portions of their savings.
“The country said trusts were very safe, just like banks,” one of the people said. “We didn’t think there would be any problems.”
Instead of enjoying their retirement, two of the people said they had to borrow money from relatives and cut back on spending.
“We ordinary people are unhappy,” said another investor. “The corruption is so serious.”
China's roughly $3 trillion trust sector is part of the country's large “shadow banking” industry, which for decades provided loans to entrepreneurs and households not served by the state banking system. Concerned about speculation and illegal practices, the authorities have tightened controls. In 2020, regulators declared victory in China's cleanup Online peer-to-peer lending industryor P2P.
Asset management companies also got into trouble.
“We believe risks will increase and potentially affect more financial sector companies if China's economic recovery continues to lose momentum and distress in the real estate sector continues,” Fitch Ratings said in a report following the collapse of another major trust company, Zhengrong.
Officials and analysts say tough measures were necessary, but investors footing the bill question how they were carried out.
“I support the Communist Party very much,” said one of the investors. “But some people denigrate the name of the party.”
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` business reporter Elaine Kurtenbach contributed to this story.
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