Huaxin Trust Struggles as Corporate Debt Problems Spill Into Shadow Banking

The wave of financial distress flooding China’s corporate sector is spilling over into a key financing channel in the shadow banking sector — the trust industry.

Huaxin Trust Co. Ltd., one of 68 companies licensed to conduct trust business, is trying to raise as much as 6.8 billion yuan ($1 billion) from strategic investors as it faces a growing liquidity squeeze that’s already forced it to skip repayments on dozens of investment products over the past few months.

The Dalian, Liaoning province-based institution announced (link in Chinese) on Tuesday that it is seeking one or more strategic investors to inject 3.4 billion yuan to 6.8 billion yuan into the firm, which would increase its registered capital to 10 billion yuan to 13.4 billion yuan.

But what drew the market’s attention was a condition stipulated by Huaxin that any investor would need to agree to “support the company’s liquidity before the completion of their investment to allow the firm to protect the interests of investors in its trust products.” One veteran trust-industry source told Caixin that it can be difficult to persuade strategic investors to provide liquidity support before even making their investment, although investors can use this as leverage to get better terms.

China’s regulators have become increasingly concerned about the hidden risks in the trust sector, which plays an important role in the shadow banking sector by providing loans to higher-risk companies and those who have difficulty getting credit from traditional banks. The loans are packaged into high-yielding products which are then sold to retail investors and institutions. The China Banking and Insurance Regulatory Commission (CBIRC) is preparing regulations to put the country’s $3.1 trillion trust industry under closer oversight. The draft rules, which were put out for public comment in May, will govern how trust companies manage client funds, clarify requirements on trust products and toughen regulation of their loan-related investments.

In June, the CBIRC told some trust firms to downsize their trust financing business according to tailored specifications provided by the regulator, multiple sources told Caixin. The unofficial orders from the regulator followed a surge in demand for loans as companies scrambled for cash to help them weather the impact of the Covid-19 outbreak or to repay maturing loans.

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Regulators Turn the Screws on Trust Financing as Risks Mount

Huaxin Trust, which has around 20 shareholders, is controlled by a Beijing-registered privately owned company called Huaxin Huitong Group Co. Ltd. whose low-profile chairman, Dong Yongcheng, holds a 9.1% stake in the trust firm, according to corporate data provider Qichaha. Huaxin Trust’s second- and third-largest shareholders are both linked to Dong’s company. Huaxin Huitong held a 60% stake in Huaxin Trust in 2015, according to a Hong Kong stock exchange filing by Shengjing Bank Co. Ltd., which is based in the northeastern province of Liaoning and which was negotiating to buy a 20% stake in the trust firm for 3.2 billion yuan. The deal subsequently fell through.

Huaxin’s hunt for investors comes as it has struggled to pay out on maturing trust products amid growing stress on its corporate borrowers. As of Thursday, the trust firm had only repaid four products that matured recently, and extended repayment on 23 products, with the earliest coming due in September, according to its website. Huaxin Trust said in announcements (link in Chinese) on its website that enterprises had failed to repay the principal and interest on the products forcing the company to extend the repayment dates as allowed in the terms and conditions of the trust products sold to investors.

The company also said (link in Chinese) that in addition to looking for strategic investors it is speeding up efforts to offload some of its underlying trust assets and its own assets. Any money raised through these sales will be used to repay investors in its trust products.

There has been growing speculation that Huaxin Trust may have had funds embezzled by its largest shareholder, but the company put out a statement (link in Chinese) on Nov. 10 denying that its largest shareholder had used or embezzled funds from the firm and saying that Huaxin Huitong “continued to give liquidity support to aid the company.”

Huaxin Trust is the latest trust firm to run into trouble in a sector already reeling from the effects of a crackdown on shadow banking and an economic slowdown exacerbated by the coronavirus pandemic. Among them are Sichuan Trust Co. Ltd., which has failed to repay investors more than 20 billion yuan, and Shanghai-listed Anxin Trust Co. Ltd., once the darling of the trust sector, which collapsed last year and was found to have a 50 billion yuan black hole on its books.

At the end of last year, Huaxin Trust had about 61.6 billion yuan of trust assets under management, according to its 2019 annual report (link in Chinese), but that had fallen to about 49.2 billion yuan by the end of June, according to Tuesday’s strategic investment statement.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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