Some investors in a troubled trust fund in China are facing financial ruin under a government plan to return a fraction of their money, casualties of a slump in the property industry and a broader economic slowdown. Sichuan Trust, headquartered in the southwest city of Chengdu, announced it was insolvent in 2020, stricken by sketchy accounting and failed investments in shopping malls and other projects. A deadline earlier this month to accept a 20%-60% \u201chaircut\u201d or loss on their investments has left some investors in deep financial trouble, according to public announcements and AP interviews with five people affected.<\/p>\n
China\u2019s economy, the world\u2019s second-largest, depends heavily on real estate development to drive growth and create jobs. Property prices and sales have languished after a crackdown on what leaders viewed as dangerous levels of borrowing, causing dozens of developers to default on their debts. At the National People\u2019s Congress session in Beijing last week, officials pledged to do more to protect investors. Premier Li Qiang said China would work to control risks and resolve the property crisis.<\/p>\n
For the people who put their life savings into Sichuan Trust and similar entities, it\u2019s likely too late. Around 300 of more than 8,000 investors refused to accept a government plan and are looking for legal help, a relative of one investor said. A few who attempted to come to Beijing during the congress to air their grievances were blocked by police, the relative said. The ruling Communist Party faces a dilemma: Debt is a problem, but falling home prices lead people to scrimp on spending.<\/p>\n
That squeezes companies\u2019 sales, so they lay off workers and cut back on investment. The result: slowing growth and less wealth to go around. Inevitably, someone will end up losing out as China\u2019s debt crisis unwinds, said Tsinghua University finance professor Michael Pettis. \u201cNobody wants to absorb the loss. If you assign it to households, you weaken consumption even more,\u201d Pettis said. \u201cIt\u2019s got to be assigned. And that\u2019s the political problem.\u201d<\/p>\n
Trusts are a cross between a bank and an investment fund. Some advertised their offerings as reliable, high interest government-backed accounts. They\u2019re actually private entities that fund projects like factories and shopping malls. Weak disclosure requirements allowed them to use money from new investors to pay what they owed earlier ones, a set-up somewhat like a Ponzi scheme.<\/p>\n
\u201cFinancial supervision was relatively loose in the past, so the design of these products, including systems for protecting investors\u2019 rights and interests, had serious issues,\u201d said Zhu Zhenxin, chief analyst at Rushi Finance Institute in Beijing. \u201cIf underlying assets of financial products won\u2019t generate enough returns to pay such high interest rates, default is inevitable.\u201d The troubles at Sichuan Trust first surfaced when the government began restricting new sales of trust products in 2020.<\/p>\n
Without revenue from new investors, it couldn\u2019t pay its outstanding debts. That summer, Sichuan Trust announced it had 25.3 billion RMB ($3.5 billion at the time) in debts it couldn\u2019t repay. The provincial government and banking regulators took control, ousting the management, reorganizing its books and launching an investigation. Hundreds of investors staged weekly protests outside the company\u2019s headquarters and their losses became a political issue.<\/p>\n
In 2021, police detained Sichuan Trust\u2019s majority shareholder Liu Canglong, a mining and real estate tycoon who was 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\u2019 funds according to a sliding scale of the original investment. The larger the investment stake, the larger the loss. That sparked more protests.<\/p>\n
\u201cWe\u2019re extremely anxious,\u201d one investor who asked not to be named told The AP. \u201cIt\u2019s so cruel, the amount of money they\u2019re giving us is so little.\u201d A person answering Sichuan Trust\u2019s hotline said the company does not take interviews and would not provide 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.<\/p>\n
The plan to return funds \u201cappropriately favors small and medium-sized investors,\u201d Sichuan Trust said earlier in a public statement, calling it \u201cfair.\u201d Those protesting fear say they\u2019ve been harassed and intimidated, subjected to police interrogations and threats from their children\u2019s employers. They\u2019ve been barred from leaving Chengdu or, at times, their housing compounds. On a recent visit to the company\u2019s headquarters, dozens of uniformed officers, half a dozen police vehicles and an empty bus were parked outside. More than a dozen plainclothes agents who refused to identify themselves followed two AP journalists around.<\/p>\n
Earlier, a Dutch journalist was shoved to the ground and forced into a police vehicle when he attempted to approach protesting investors. \u201cThey abduct you, they threaten your children,\u201d said another investor, who also did not want to be identified due to fears of more police harassment. \u201cThey have so many dirty tricks.\u201d Analysts say investors were bound to suffer big losses given the size of Sichuan Trust\u2019s debts. Chinese media have reported on the problem, but focused on alleged wrongdoing by those who ran the trust, presenting the repayment plan as a fair solution.<\/p>\n
Some of the more than 95% of investors who signed off on the plan said they agreed under duress and were threatened with bigger losses if they didn\u2019t meet a March 5 deadline. Trusts have a high minimum investment \u2013 for Sichuan Trust it was generally 300,000 yuan ($42,000) \u2013 and many people believed mostly the relatively well-off were affected. However, some investors were retirees who said they met the investment threshhold by collecting money from friends and relatives who now want their money back. For them, Sichuan Trust\u2019s default is a calamity.<\/p>\n
\u201cThey\u2019re so poor, they don\u2019t have money to spend,\u201d said a relative of investors who lost money to the trust. \u201cThey don\u2019t have money for medical treatment. They have to borrow money to survive.\u201d Those interviewed said the name Sichuan Trust led them to believe it was a trustworthy financial institution like a bank, with a steady, fixed interest rates, rather than a risky investment fund. They were attracted by the 8% or 9% interest rates it promised \u2013 multiple times higher than traditional savings accounts. Some financially unsophisticated retirees invested large chunks of their life savings.<\/p>\n
\u201cThe country said trusts are very safe, like banks,\u201d one of the people said. \u201cWe didn\u2019t think there would be problems.\u201d Instead of enjoying their retirements, two of the people said, they\u2019ve had to borrow money from relatives and cut back on their expenses. \u201cWe ordinary people are miserable,\u201d another investor said. \u201cThe corruption is so serious.\u201d China\u2019s roughly $3 trillion trust sector is part of a large \u201cshadow banking\u201d industry in the country, which for decades supplied credit to entrepreneurs and households not served by the state-run banking system.<\/p>\n
Concerned over speculation and illegal practices, authorities have tightened controls. In 2020, regulators declared victory in cleaning up China\u2019s online peer-to-peer lending industry, or P2P. Wealth management companies also have gotten into trouble. \u201cWe believe risks could increase, potentially affecting more financial-sector entities, if China\u2019s economic recovery continues to lose momentum and the property sector\u2019s distress is sustained,\u201d Fitch Ratings said in a report after the collapse of another big trust company, Zhengrong.<\/p>\n
Officials and analysts say crackdowns have been necessary, but investors footing the bill are questioning how they\u2019ve been carried out. \u201cI support the Communist Party very much,\u201d one of the investors said. \u201cBut some people are blackening the Party\u2019s name.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
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