Investors in China trust fund in strife

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 this month to accept a “haircut” or loss on their investments of between 20 and 60 per cent has left some investors in deep financial trouble, according to public reports and AP interviews.

China’s economy, the world’s 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’s 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.

For the people who put their life savings into Sichuan Trust and similar entities, it’s likely too late. About 300 of more than 8000 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.

Trusts are a cross between a bank and an investment fund. But 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.

The troubles at Sichuan Trust first surfaced when the government began restricting new sales of trust products in 2020. Without revenue from new investors, it couldn’t pay its debts.

Its plan to return funds “appropriately favours small and medium-sized investors”, Sichuan Trust said.

Some of the more than 95 per cent of investors who signed off on the plan said they agreed under duress.

Some financially unsophisticated retirees invested large chunks of their life savings.