Mutual Funds Now Embroiled in Trust Crisis

Chinese investors still believe they will not lose money on their investments because all the investors have been made whole in prior deals. Yet as the number of defaults rises and spreads to new markets, eventually this streak will end.

Chinese mutual funds caught up in shadow banking fallout

Earlier this month, Shanghai Goldstate Brilliance Asset Management, an alternative investment arm of Value Partners Goldstate, announced a 600 million yuan real estate fund would not be able to pay interest to investors, indicating the product would fail amid a weakened property market.

At the same time, Wanjia Win-Win, a subsidiary of Wanjia Asset Management, said it had uncovered fraudulent actions by a partner, Shenzhen Jingtai Fund Management, in the operations of a real estate fund started in June.

Win-Win accused Jingtai of violating the product's agreed investment strategy and misusing 800 million yuan in cash for other projects.

A source close to executives of the two funds said part of the misused 800 million yuan was transferred to the project that Goldstate invested in, in an attempt to disguise problems, a move he described as robbing Peter to pay Paul.