As a flood of unregulated cash swirls through the Chinese economy, Beijing has been taking aim at the trust companies whose unrestrained lending practices are worrying regulators.
The trusts, at the heart of a vast shadow banking industry, are being pressured to step up compliance and background checks, and are being pushed toward greater transparency.
But the fast-growing 20 trillion yuan (SR11.63 trillion) industry, whose lending operations are cloaked behind opaque structures, will be tough to rein in, according to employees at some trusts.
A regulatory sanction against one trust, Shanghai International Trust, and a legal case against another, National Trust, offer rare insights into the industry, and reveals just how hard it will be to police it.
Shanghai Trust was fined 200,000 yuan for selling a product that violated leverage rules, according to a regulator’s notice in January. Regulators provided no further details about the case. Under these rules, property developers are only allowed to borrow up to three times their existing net assets.
According to two people with direct knowledge of the case, an unknown sum was loaned by China Construction Bank through Shanghai Trust to Cinda Asset Management Company. Cinda then invested the cash.
One of the sources said Cinda used the cash to acquire land, a sector rife with speculation that regulators have singled out as a “risky” destination for trust company loans. The source provided no further details.
Shanghai Trust, Cinda, CCB and the China Banking Regulatory Commission (CBRC) declined to comment for this story.
The case against National Trust, which had revenue of 655 million yuan in 2016, involves wealth management products linked to the steel industry.
The trust was sued in June this year by eight investors who allege it misrepresented the risks involved in products it sold them and failed to adequately assess the guarantor’s creditworthiness.
The trust skirted restrictions on loans to the steel industry by using the products to raise money to lend to a subsidiary of Bohai Steel Group, according to Tang Chunlin, a lawyer at Yingke Law Firm, who is representing the investors.
The plaintiffs invested different sums in the wealth management products, which National Trust promised would deliver an annual return of over 9 percent. National Trust lent the money collected to a Bohai subsidiary, Tianjin Iron and Steel Group Company, according to documents reviewed by Reuters.
Bohai Steel Group, which is undergoing a state-financed restructuring, has liabilities of around 192 billion yuan.
National Trust has now defaulted on the product, according to Tang and Gongyu Zhou, one of the eight investors, because Tianjin Iron and Steel is unable to pay back its loan.The products were also illegally sold via third-party non-financial institutions, Tang and Zhou said.
Zhou said he invested one million yuan in the product over two years from 2015 through 360caifu.com, an online finance platform.
Bohai Steel Group, Tianjin Iron and Steel and 360caifu.com did not respond to requests for comment. National Trust declined to comment.