Sichuan Trust in trouble as list of claims, debts grows

Trust bosses hope to meet their payment dues by selling shares and property, but market observers believe the state may need to intervene to 'reorganise' the $3-trillion trust sector 

Sichuan Trust in trouble as list of claims, debts grows
Billions of yuan invested in Sichuan Trust are reportedly at risk following the collapse of the Trust in southwestern China. File photo by AFP.

(ATF) The bosses of Sichuan Trust, which has been accused of impropriety in its asset dealings, appear to be hoping they can get out of trouble by selling stocks and properties. Videos posted online show hundreds of angry investors protesting at the Trust’s main office in Chengdu (and police were quite brutal in breaking up the protest last week).

Industry analysts see the Sichuan Trust issue as the tip of an iceberg and say the state may have to step in to re-organise the $3.1-trillion trust sector, essentially by nationalising it.

Regulators have been trying to bring the industry under closer oversight. In 2019, nearly a third of China's 68 trust companies were hit with fines totalling 22.5 million yuan ($3.2 million) for offences such as off-balance-sheet lending and illegal real estate investments.

Investors are angry that the trust was operating as a kind of pyramid-style 'Ponzi scheme', with its TOT – Trust of Trust – activities. Sources have told Caixin that 10 to 20 billion yuan of investments may be at risk.

On July 2, a reporter from the Beijing Commercial Daily learned from investors that the privately-owned Sichuan Trust is now under official supervision and evidence is being collected on illegal acts it may have committed. The Daily also learned from multiple investors that Sichuan Trust will redeem investors' funds according to what is available after “clearance.”

At present, eight projects have been wound up. Analysts told the Beijing papers there was a high probability that Sichuan Trust's collapse would need state funds to help “reorganise” the trust.

In mid-June, multiple fund products run by Sichuan Trust became overdue in paying investors, which quickly drew attention. The trust products involved were mainly a series of collective funds. After this occurred, the Trust communicated with investors several times and provided preliminary solutions.

Investors told the Beijing Business Daily on July 2 that regulators are collecting evidence on the violations of laws and regulations by Sichuan Trust, and shareholders suspected of misappropriating funds are also being rounded up. The initial plan was to use the trust's own assets to solve the issue, but investigators have allegedly found that the "hole" may be bigger than first thought.

Funds 'embezzled by shareholders'

As early as June 17, Zhou Shan, deputy director of the Sichuan Banking and Insurance Regulatory Bureau, alleged at a communication meeting with investors that Sichuan Trust’s TOT business had failed to truly disclose its underlying asset risk status, that it carried out transactions illegally and that a large amount of project funds had been embezzled by shareholders.

There were also other illegal acts which allegedly violated the Trust Law and the Banking and Insurance Regulatory Commission's regulations on the management of financial institutions’ assets.

Solving the problem of payments as soon as possible will be the Trust's key focus in the coming year. The Beijing Business Daily said the Trust's main leaders met with a number of customer representatives recently. For overdue projects, they plan to sign an extension agreement with investors. A draft agreement has been submitted to regulatory authorities for review.

The company has stepped up its efforts to focus about 70% of its work on the collection of risky assets. An appropriate form will be used to confirm long-term communication, study the establishment of a public information release platform, and disclose relevant conditions of the project and the disposal of underlying assets.

Apology to investors

Sichuan Trust's official website issued an "open letter to investors" last Monday evening (June 29) that said the company would "strive within one year" to fix its problems. It apologised to investors and said  some financing companies could not return trust funds on time due to the impact of the global economic downturn and the coronavirus epidemic, plus the suspension of TOT trust products. This had led to some trust products not being distributed on time.

Sichuan Trust said it would extend contracts in accordance with the trust contract, and strive to recover funds by disposing of underlying assets within one year and allocating them in a timely manner, according to the progress of fund recovery. The open letter also stated that Sichuan Trust would enhance the company's capital strength and supplement liquidity by disposing of its own assets and bringing in strategic investors.

But angry investors who demonstrated late last week did not agree to this proposal and questioned if the disposal of trust assets was going smoothly. 

According to the latest information provided by investors, only China Shipping Trust and another major shareholder had voted on plans to sell real estate in Chuanxin building and transfer equity in Hongxin Securities Co Ltd – other directors had not voted.

Shareholders

According to data in Sichuan Trust's 2019 annual report, groups with 10% or more of the company's shares are: Sichuan Hongda (Group) Co Ltd, China Shipping Trust and Sichuan Hongda Co Ltd, which held just over 32%, 30%, 22%, respectively. Caixin listed Mou Yue as chairman of the trust and Liu Jingfeng as its president. It said local regulators began to closely monitor the company late last year with banking officials occasionally sent to work onsite.

Work on asset appraisal on the equity in Chuanxin Building and Hongxin Securities was progressing smoothly with an evaluation team from China Enterprise Hua Asset Appraisal Company. The Trust had also started to prepare relevant data for equity transfer, according to the list of materials required by equity exchange listing rules.

But there had been little progress in increasing capital and expanding shares. If a capital increase of 1.5 billion yuan could not be met, strategic investors would be sought. Foreign investment work is divided between Hong Kong and Macau Overseas Group, Central Enterprise Group, and others. However, two shareholders have expressed no intention to increase their capital in Sichuan Trust.

Li Kuilin, a senior trust industry observer, predicted that the market would inevitably raise concerns about the safety of fund projects issued by other trust companies, saying the amount of funds that trusts raised would decline.

Li believed it was highly likely that Sichuan Trust's problems would attract state capital to reorganise the trust sector. "In the future, funds in the trust market will increasingly gather in a 'national team' of trust companies," he said.