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China’s Sichuan Trust Bankrupts, Retirees Face Financial Ruin
CHENGDU, China (AP) — Some investors in a troubled trust fund in China are facing financial ruin under a government plan to return a fraction of their money, victims of a recession in the real estate sector and a broader economic slowdown.
Sichuan Trust, based in the southwestern city of Chengdu, announced it was insolvent in 2020, hit by inaccurate accounting and failed investments in shopping malls and other projects. The deadline set earlier this month to accept a “cut” or loss of 20%-60% on your investments has left some investors in deep financial trouble, according to public announcements and AP interviews with five people affected.
China’s economy, the world’s second largest, relies heavily on real estate development to drive growth and create jobs. Home prices and sales languished after a crackdown on what leaders considered dangerous levels of debt, causing dozens in developers stop paying your debts.
At the National People’s Congress session in Beijing last week, authorities pledged to do more to protect investors. Premier Li Qiang said China will work to control risks and resolve the housing crisis.
For people who invest their savings in Sichuan Trust and similar entities, it is probably too late. About 300 of more than 8,000 investors have refused to accept a government plan and are seeking legal help, an investor’s family member said. Some who tried to come to Beijing during the congress to air their grievances were blocked by police, the family member said.
O Communist Party in power faces a dilemma: debt is a problem, but falling house prices lead people to save on spending. This compresses company sales, which lay off workers and cut investments. The result: slowing growth and less available wealth.
Inevitably, someone will end up losing as China’s debt crisis unfolds, said Michael Pettis, a finance professor at Tsinghua University.
Women near security personnel outside the barricaded Sichuan Trust office building in Chengdu, Sichuan province, February 27, 2024. (AP Photo/Andy Wong)
“Nobody wants to absorb the loss. If you attribute this to families, you weaken consumption even further,” said Pettis. “It has to be attributed. 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 accounts backed by the government. In fact, they are private entities that finance projects such as factories and shopping centers. Weak disclosure requirements allowed them to use money from new investors to pay what they owed to previous ones, in a setup similar to a Ponzi scheme.
“Financial supervision was relatively lax in the past, so the design of these products, including systems to protect investors’ rights and interests, has had serious problems,” said Zhu Zhenxin, chief analyst at Rushi Finance Institute in Beijing. “If the underlying assets of financial products do not generate sufficient returns to pay such high interest rates, default will be inevitable.”
Problems at Sichuan Trust first emerged when the government began restricting new sales of trust products in 2020. Without revenue from new investors, it could not pay its outstanding debts.
Plainclothes police and security personnel guard the entrance gate of the Sichuan Trust office building in Chengdu, Sichuan province, February 27, 2024. (AP Photo/Andy Wong)
That summer, Sichuan Trust announced that it had 25.3 billion RMB ($3.5 billion at the time) in debt that it could not pay. The provincial government and banking regulators took control, removing management, reorganizing its accounting and launching an investigation.
Hundreds of investors organized weekly protests in front of the company’s headquarters and their losses became a political issue.
In 2021, police detained Sichuan Trust’s majority shareholder, Liu Canglong, a mining and real estate magnate who was once the richest man in Sichuan, a province with more than 80 million people. He is accused of embezzling trust funds.
In December, the trust announced that it would return investors’ funds according to a sliding scale of the original investment. The greater the stake in the investment, the greater the loss.
This sparked more protests.
“We are extremely anxious,” an investor who asked not to be identified told the AP. “It’s so cruel, the amount of money they give us is so small.”
A person who answered the Sichuan Trust hotline said the company does not conduct 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.
The funds return plan “appropriately favors small and medium-sized investors,” Sichuan Trust said earlier in a public statement, calling it “fair.”
Those protesting the fear say they have been harassed and intimidated, subjected to police interrogations and threats from their children’s employers. They were prevented from leaving Chengdu or, sometimes, their housing estates.
On a recent visit to the company’s headquarters, dozens of uniformed officers, half a dozen police vehicles and an empty bus were parked outside. More than a dozen undercover officers who refused to identify themselves followed two AP journalists.
Previously, a Dutch journalist was thrown on the floor and forced into a police vehicle when he tried to approach protesting investors.
“They kidnap you, they threaten your children,” said another investor, who also declined to be identified for fear of further police harassment. “They have so many dirty tricks.”
Analysts say investors will suffer huge losses due to the size of Sichuan Trust’s debts. Chinese media reported on the problem but focused on alleged wrongdoing by those running the trust, presenting the repayment plan as a fair solution.
Some of the more than 95% of investors who signed on 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 – for the Sichuan Trust it was generally 300,000 yuan ($42,000) – and many people believed that mainly the relatively well-off were affected.
However, some investors were retired and said they had reached their investment limit by collecting money from friends and family who now want their money back. For them, the Sichuan Trust’s default is a calamity.
“They are so poor they have no money to spend,” said a family member of investors who lost money to the trust. “They don’t have money for medical treatment. They have to borrow money to survive.”
Respondents said the name Sichuan Trust led them to believe it was a reliable financial institution, like a bank, with fixed and stable interest rates, rather than a risky investment fund. They were attracted by the promised interest rates of 8% or 9% – several times higher than those on traditional savings accounts. Some retirees without financial sophistication invested large portions of their savings.
“The country said trusts are very safe, like banks,” said one of the people. “We didn’t think there would be any problems.”
Instead of enjoying retirement, two people said, they had to borrow money from relatives and cut back on expenses.
“We ordinary people are unhappy,” said another investor. “Corruption is very serious.”
China’s roughly $3 billion trust sector is part of a large “shadow banking” industry in the country, which for decades has provided credit to entrepreneurs and families not served by the state banking system. Concerned about speculation and illegal practices, authorities tightened controls. In 2020, regulators declared victory in cleaning up China online peer-to-peer lending industryor P2P.
Wealth Management Companies they also had problems.
“We believe risks could increase, potentially affecting more financial sector entities, if China’s economic recovery continues to lose momentum and real estate sector difficulties continue,” Fitch Ratings said in a report following the collapse of another large trust company , Zhengrong.
Officials and analysts say the crackdowns were necessary, but investors footing the bill question how they were implemented.
“I really support the Communist Party,” said one of the investors. “But some people are denigrating the Party’s name.”
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AP Business Writer Elaine Kurtenbach contributed to this story.