Government to Dispatch Team to Deal With Risks at Huaxin Trust

A local government team will be dispatched to deal with the risks posed to the financial system by Huaxin Trust Co. Ltd., after the company struggled to pay out on dozens of investment products.

Huaxin Trust, one of the country’s 68 licensed trust companies, is taking measures to dispose of its risks under the guidance of local officials and financial regulators, according to a statement (link in Chinese) released Wednesday by the finance bureau of its home city of Dalian, in Northeast China’s Liaoning province.

Authorities will send a working group to aid the firm as it liquidates its assets, searches for strategic investors and restructures its business, according to the statement, adding that the goal is to protect the legitimate rights and interests of the company’s creditors and to maintain financial order and social stability.

The statement said Huaxin Trust had an invalid corporate governance mechanism, had engaged in illegal activity and had outstanding credit and liquidity risks. On Wednesday, Liaoning police said (link in Chinese) investors had repeatedly reported the company for suspected economic crimes, adding that an investigation had found evidence of illegal loan issuances and misappropriation of entrusted property.

The current crisis came into public view between September and November last year when Huaxin Trust delayed payment (link in Chinese) on dozens of trust products amid growing stress on its corporate borrowers.

In November, the firm announced it was seeking strategic investors to raise as much as 6.8 billion yuan ($1.1 billion) to support its liquidity. The company is yet to secure any strategic investors, sources with knowledge of the matter told Caixin. Last year, the firm reported 2.7 billion yuan of net losses on revenue of 1.7 billion yuan.

Huaxin Trust, which has around 20 shareholders, is controlled by privately owned Beijing-registered company Huaxin Huitong Group Co. Ltd. Huitong Group’s low-profile chairman, Dong Yongcheng, holds a 9.1% stake in the trust firm, according to corporate data provider Qichacha. In January, Dalian police announced they had detained Dong after he assaulted and injured Huaxin Trust’s General Manager Wang Jin over a work dispute.

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

In February, China’s top banking and insurance regulator pledged to continue its crackdown on the trust industry this year, with a particular focus on curbing trust financing and channel lending to reduce mounting risks in the sector.

Timmy Shen contributed to this report.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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