Elderly retirees face big losses after Chinese trust goes bust, reflecting turbulent economy

CHENGDU – Some buyers in a trust fund in China are going through monetary destroy underneath a central authority plan to go back a fragment in their cash, casualties of a hunch within the belongings trade and a broader financial slowdown.

Sichuan Trust, headquartered within the southwest town of Chengdu, introduced it used to be bancrupt in 2020, bothered by way of sketchy accounting and failed investments in buying groceries shops and different initiatives. A cut-off date previous this month to simply accept a 20%-60% “haircut” or loss on their investments has left some buyers in deep monetary bother, in line with public bulletins and AP interviews with 5 other folks affected.

China’s economy, the arena’s 2d greatest, is dependent closely on actual property construction to power expansion and create jobs. Property costs and gross sales have languished after a crackdown on what leaders considered as unhealthy ranges of borrowing, inflicting dozens of developers to default on their money owed.

At the National People’s Congress consultation in Beijing closing week, officers pledged to do extra to give protection to buyers. Premier Li Qiang mentioned China would paintings to keep watch over dangers and unravel the valuables disaster.

For the individuals who put their existence financial savings into Sichuan Trust and an identical entities, it is most likely too overdue. Around 300 of greater than 8,000 buyers refused to simply accept a central authority plan and are on the lookout for prison assist, a relative of 1 investor mentioned. A couple of who tried to return to Beijing all over the congress to air their grievances have been blocked by way of police, the relative mentioned.

The ruling Communist Party faces a catch 22 situation: Debt is an issue, however falling house costs lead other folks to stint on spending. That squeezes firms’ gross sales, in order that they lay off staff and reduce on funding. The outcome: slowing expansion and no more wealth to move round.

Inevitably, any person will finally end up dropping out as China’s debt disaster unwinds, mentioned Tsinghua University finance professor Michael Pettis.

“Nobody wants to absorb the loss. If you assign it to households, you weaken consumption even more,” Pettis mentioned. “It’s got to be assigned. And that’s 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’re 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.

“Financial supervision was relatively loose in the past, so the design of these products, including systems for protecting investors’ rights and interests, had serious issues,” mentioned Zhu Zhenxin, leader analyst at Rushi Finance Institute in Beijing. “If underlying assets of financial products won’t generate enough returns to pay such high interest rates, default is inevitable.”

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 outstanding debts.

That summer, Sichuan Trust announced it had 25.3 billion RMB ($3.5 billion at the time) in debts it couldn’t 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’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 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’ funds according to a sliding scale of the original investment. The larger the investment stake, the larger the loss.

That sparked more protests.

“We’re extremely anxious,” one investor who asked not to be named told The AP. “It’s so cruel, the amount of money they’re giving us is so little.”

A person answering Sichuan Trust’s 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.

The plan to return funds “appropriately favors small and medium-sized investors,” Sichuan Trust said earlier in a public statement, calling it “fair.”

Those protesting fear say they’ve been harassed and intimidated, subjected to police interrogations and threats from their children’s employers. They’ve been barred from leaving Chengdu or, at times, their housing compounds.

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 plainclothes agents who refused to identify themselves followed two AP journalists around.

Earlier, a Dutch journalist used to be shoved to the ground and compelled right into a police car when he tried to method protesting buyers.

“They abduct you, they threaten your children,” said another investor, who also did not want to be identified due to fears of more police harassment. “They have so many dirty tricks.”

Analysts say investors were bound to suffer big losses given the size of Sichuan Trust’s 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.

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’t meet a March 5 deadline.

Trusts have a high minimum investment — for Sichuan Trust it was generally 300,000 yuan ($42,000) — 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’s default is a calamity.

“They’re so poor, they don’t have money to spend,” said a relative of investors who lost money to the trust. “They don’t have money for medical treatment. They have to borrow money to survive.”

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 – multiple times higher than traditional savings accounts. Some financially unsophisticated retirees invested large chunks of their life savings.

“The country said trusts are very safe, like banks,” one of the people said. “We didn’t think there would be problems.”

Instead of playing their retirements, two of the folks mentioned, they have needed to borrow cash from kin and reduce on their bills.

“We ordinary people are miserable,” some other investor mentioned. “The corruption is so serious.”

China’s kind of $3 trillion trust sector is a part of a big “shadow banking” trade within the nation, which for many years provided credit to marketers and families no longer served by way of the state-run banking machine. Concerned over hypothesis and unlawful practices, government have tightened controls. In 2020, regulators declared victory in cleansing up China’s online peer-to-peer lending industry, or P2P.

Wealth management companies additionally have got into bother.

“We believe risks could increase, potentially affecting more financial-sector entities, if China’s economic recovery continues to lose momentum and the property sector’s distress is sustained,” Fitch Ratings mentioned in a file after the cave in of some other big trust corporate, Zhengrong.

Officials and analysts say crackdowns had been vital, however buyers footing the invoice are wondering how they have been performed.

“I support the Communist Party very much,” one of the investors said. “But some people are blackening the Party’s name.”

___

AP Business Writer Elaine Kurtenbach contributed to this tale.