China Regulators Intervene at Another Troubled Shadow Lender

(Bloomberg) -- Chinese authorities will move to strengthen management of the troubled Sichuan Trust Co. after its shareholders allegedly refused to return misappropriated funds, marking another instance where risks in the nation’s $3.2 trillion trust sector have forced regulators to step in.

The regional banking regulator and the local government will dispatch a working group to lead a restructuring of the Chengdu-based company to maintain social and financial stability, the China Banking and Insurance Regulatory Commission said in a statement on Tuesday. Sichuan Trust was found to have funneled some loans and trust funds to certain shareholders and their affiliates, according to the statement.

“In recent years, the firm’s corporate governance has failed, internal controls are non-existent and the management has been ignoring regulations to engage in illicit activities via hidden means,” leading to significant risks and operating difficulties, the CBIRC said in the statement.

Sichuan Trust in June failed to repay at least 40 million yuan ($6 million) of high-yielding products and hundreds of its investors gathered at its headquarters to demand their money back, according to local media reports. Established in 2010, the firm has over 300 billion yuan of assets under management.

The latest move comes as China’s 68 trust firms, a key alternative funding source for weaker borrowers unable to get regular bank loans, struggle to cope with climbing defaults. Roiled by the pandemic, many corporates are now unable to repay their debts.

The sector has already seen several state rescues. Shanghai-listed Anxin Trust Co. said in March the government had been involved in its restructuring plan to avoid triggering “systemic financial risks.” In July, the CBIRC assumed control of New Times Trust Co. and New China Trust Co., along with seven other financial firms linked to Tomorrow Group.

The CBIRC said the firm is unable to operate normally and it will restrict four shareholders from participating in management from Dec. 22. Sichuan Hongda Co., one of those named by the regulator, slumped as much as 10% in Shanghai on Wednesday.

China’s trust industry, once the fastest-growing pocket of shadow banking, has shrunk by a fifth since authorities started a crackdown three years ago to curb risks. Total assets stood at 20.9 trillion yuan at the end of September, down by 5.4 trillion yuan from a peak at the end of 2017, according to the China Trustee Association.

Assets managed by trust firms have dropped as they turn more risk averse and significantly reduce their funding to the highly-leveraged property sector, Moody’s Investors Service said in a report in September.

There is likely to be more pain to come. The trust sector has over 3 trillion yuan in high-yield investment products, sold to banks, institutional investors and wealthy individuals, come due over the next nine months.

©2020 Bloomberg L.P.

With assistance from Bloomberg