Date
15 December 2017
China's central bank faces a regulatory challenge as companies push the boundaries in internet finance products. Photo: Bloomberg
China's central bank faces a regulatory challenge as companies push the boundaries in internet finance products. Photo: Bloomberg

‘Trust 100′ pushes the envelope in internet finance

There is no argument nowadays that the internet lowers the cost of doing several things. One can call someone overseas for free through the Web, can buy many goods cheaper online, get steep discounts on hotel rooms, etc. And now, in China, it appears that the internet will also enable an individual to invest like an institutional entity even if the person has very limited funds.

‘Trust 100′, a trust investment product launched last month by internet finance firm Cstpay.com has set tongues wagging with a bold initiative that offers retail investors an annual yield of as much as 12 percent.

The most innovative thing about the fund is that it largely pulls down the high threshold of investing in a trust. Retail investors can put in as little as 100 yuan into the trust product, flying in the face of the normal rules governing such investments. According to guidelines issued by the China Banking Regulatory Commission earlier, a person or entity has to have at least 1 million yuan of financial assets in order to be a qualified investor in a trust fund product.

But the Trust 100 enables a person to bypass the usual rules. Given the product’s scale of 1 million yuan, as many as 10,000 investors can participate in the investment. The practice breaks the rule that the number of investors in a single trust must not exceed 50.

Like Yu Le Bao {娛樂寶}, the entertainment investment fund from the Alibaba Group, Cstpay.com is surfing into the industry’s grey area. Yu Le Bao, which was launched last month, receives money from retail investors to invest in film and television program production and online game projects.

Trust 100 is innovative at first sight, as it finds ways to make trust investing common. But obviously, investors have to face unknown risks. After all, trust offerings are different from general investment products; that’s why they have separate rules.

Cstpay.com says on its website that it offers 100 percent guarantee that investors will receive the principal and yield when the trust product matures. But professionals question the validity of such guarantee.

China Securities Journal quoted an industry law expert saying that as investors are neither clients nor beneficiaries of the trust in this case, they have no rights to press claims on the trust if anything goes wrong. “In the most extreme case, if this finance firm goes broke, investors could be left nothing.”

In fact, the high investment threshold of the trust industry, which means only sophisticated investors are welcome, indicates that investing in a trust product is a high-risk activity.

China’s trust industry has seen a string of troubles since the start of the year. In January, China Credit Trust narrowly averted default on a 3 billion yuan product. Were it not for a bailout deal, it would have marked the biggest trust default in at least a decade.

In February, a trust product issued by Jilin Trust failed to meet redemption obligations, fueling renewed concerns over the industry.

Some experts have said the defaults maybe just the tip of the iceberg, given the US$1.7 trillion scale of China’s trust industry. 

China Cinda Asset Management (01359.HK), which specializes in investing in distressed assets, believes the trust default rate could explode in the next three to four years as the economy slows.

– Contact the writer at [email protected]

RC

EJ Insight writer

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