18 April 2019
Individual investors on the mainland are being drawn to riskier investment vehicles. Photo: Bloomberg
Individual investors on the mainland are being drawn to riskier investment vehicles. Photo: Bloomberg

Umbrella trust bubble sparks concern in mainland

Although it has nothing to do with Hong Kong’s Umbrella movement, the rise of the “umbrella trust” is causing concern in the mainland.

Mainland securities firms are selling the highly leveraged collective investment product to individual investors to help them ride the wave of rapidly rising stock prices, Apple Daily reported Tuesday.

Analysts say leveraged investments were the main driver of the recent record volumes of trading in A shares, which topped 1 trillion yuan (US$160 billion) a day for several sessions.

The new investment product is a basket of subtrusts, each of which has a fund dedicated to investing in the A-share market.

Early investors in the product lend to later ones at a high interest rate. The leverage is used to boost the amount of shares the latecomers can buy.

An employee of Hongyuan Securities in Shenzhen was quoted by the newspaper as saying such trust products have become very popular.

Investors with capital of 1 million yuan can buy 4 million yuan worth of shares at an annualized interest rate of 0.9 percent, higher than the average of 0.7 percent payable in margin trading, he said.

However, while investors trading on margin can buy shares only on the main board of the exchanges, umbrella trusts enable them to buy shares on the secondary boards and shares subject to special treatment, the report said.

An employee of Huaxi Securities strongly recommended that a reporter from the newspaper buy an umbrella product that offers five times’ leverage at an annualized interest rate of as high as 14 percent. She said such trust products have reached 200 billion yuan in size.

All the staff the reporter approached at brokerages introduced the umbrella trust products verbally and refused to provide any written materials or conduct a risk evaluation for the reporter.

Analysts say such high-risk investments could increase fluctuations in the A-share market, as once the market falls, the highly leveraged investors may be forced to sell their shares. 

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