beyondbrics

No, not that Carlyle. And not that Buffett. Welcome to the alternate universe of Chinese finance.

A Chinese investment firm going by the name of Carlyle has accused the investment adviser to a fund known as the Buffett No. 1 Plan of committing fraud. The adviser of the Chinese Buffett fund has in turn accused the Chinese Carlyle of money laundering. Both deny the allegations.

The, er, borrowing of prominent names – Carlyle is of course a top global private equity firm and Warren Buffett needs no introduction – adds a touch of levity to an otherwise complex dispute. But make no mistake: the claims and counterclaims shed an unflattering light on China’s investment industry.

The product in question was officially known as the Tianxin Muxue Buffett No. 1 Securities Investment Combined Unit Trust Plan. Warren Buffett is revered in China as a brilliant investor and there is no exclusive trademark on his Chinese name, allowing companies to use it liberally when they want to brand themselves as sound, profitable money managers.

The Buffet No. 1 Plan was a classic example of a trust product, an investment option that has become very popular in China over the past five years. Trusts offer among the highest returns of any investment option in China. They generate those returns by putting their money to work in higher-risk ventures, whether lending to property developers or taking stakes in fledgling companies.

Trusts have become a huge business. Their total assets under management increased 55 per cent last year to Rmb7.5tn ($1.2tn), allowing the trust sector to surpass the insurance sector as the second-biggest part of China’s financial industry, ranking behind only banks.

But trusts offer extremely limited disclosures about how they actually invest their funds. In the case of the Buffett No. 1 Plan, Tianjin Trust, the company that issued the plan last November did not publish any details about how the money would be used. It instead instructed investors to call it directly, according to the announcement it made when launching the product.

Tianjin Trust was ultimately able to raise Rmb600m for the Buffet No. 1 Plan, offering investors a maturity of one year. One-year returns on trusts are usually about 7 to 10 per cent.

As is often the case with trusts, the biggest source of funding for the Buffett No. 1 Plan was a bank. The Shanghai arm of the Bank of China, the country’s third biggest bank by assets, invested nearly Rmb400m in the product, according to Tianjin Trust.

Banks invest in trusts as part of the process of managing money for rich clients. They also use trust investments to spruce up the returns on wealth management products, the deposit-like instruments that they offer as a higher-yielding alternative to ordinary savings accounts. The regulator has tried in the past year to limit the flow of funds from banks to trusts because of concerns about how the money is ultimately being invested, but banks can still find plenty of legal ways to channel funds to trusts.

The troubles for Buffet No. 1 stemmed from a complaint not by Bank of China but by the plan’s other funding source: the Shenzhen Kailei investment company, which had invested Rmb200m.

Kailei is the Chinese name for Carlyle, and is another popular choice for financial firms – a gold-plated name that cannot be exclusively trademarked on a nationwide basis. A spokesman for Carlyle Group, the global private equity firm, said that it had no relationship whatsoever with Shenzhen Kailei.

The Buffett No. 1 dispute began when Shenzhen Kailei accused Jiangsu Muxue, the company appointed by Tianjin Trust as an investment adviser for the plan, of embezzling Rmb100m. Tianjin Trust posted an announcement on its website on January 31 saying that police in Hubei province were investigating Jiangsu Muxue.

The China Securities Journal, a state-run newspaper, carried a rebuttal from Jiangsu Muxue. It denied any wrongdoing and instead accused Shenzhen Kailei of withdrawing its funds from the Buffet No. 1 Plan to launder money. Shenzhen Kailei denied that.

Unable to resolve the dispute, Tianjin Trust opted for an early liquidation of the fund. On February 20 it announced that it had returned all the cash in full to the investors.

No money was lost but the fund was wound down nearly ten months ahead of schedule. And the clash of the titans – Carlyle versus Buffett, the Chinese edition – was brought to a close.

Related reading:
Deflating shadow credit in China, FT Alphaville
China to tighten shadow banking rules, FT
Guest post: the danger in China’s shadow banks and bank-trust products, beyondbrics
Chinese banks’ Weapons of Mass Ponzi, FT Alphaville