Shadow banking under fire: AVIC Trust’s collapse

Over the past month, Shanghai resident Chen Hui (pseudonym) has travelled to Beijing three times. Each time he checked into a hotel, police officers knocked on his door late at night, urging him “to safeguard his rights rationally and in accordance with the law”.

Two years ago, Chen invested 4 million RMB (about US$576,500) in AVIC Trust. According to the contract, the investment was due to mature in February last year, but the funds have yet to be repaid. Statistics show that in China, more than 10,000 investors are in a similar predicament, with total unrepaid funds exceeding 60 billion RMB.

Some investors like Chen have gone to Beijing to lodge petitions; others have sought redress locally, with a few even being placed under administrative detention for their actions. Yet others have turned to the courts, filing lawsuits over issues such as information disclosure and contract validity.

In recent years, the collapse of financial platforms has not been uncommon in China. What sets AVIC Trust apart, however, is that it is backed by China’s state-owned aerospace and defence conglomerate, the Aviation Industry Corporation of China (AVIC). Since its establishment, it has been regarded as a “star institution” in the trust industry, ranking among the top players in terms of revenue and assets under management.

Yet amid China’s economic slowdown and intensified anti-corruption campaign, even a central state-owned background failed to prevent defaults, and the implosion of AVIC Trust has once again pushed the systemic risks of China’s shadow banking sector into the spotlight.

AVIC Trust’s crisis came to light on 18 April last year, when it was placed under custodianship by CCB Trust and SDIC Taikang Trust. AVIC Trust is the third trust company to be taken over under China’s Trust Law since its implementation in 2001, and the first large trust firm backed by a central state-owned enterprise (SOE) to be placed under custodianship.

However, based on information gathered by Lianhe Zaobao from more than ten investors, AVIC Trust products began to see delayed repayments as early as February last year. Investors repeatedly sought clarification from AVIC Trust, only to be reassured time and again that a central SOE “would not break its promises”. Even two days before the custodianship announcement on 16 April last year, investors were still being told unequivocally: “There will definitely be no custodianship.”

“Custodianship” refers to a regulatory measure whereby, when risks at a trust company are exposed, regulators appoint other trust institutions to take over its day-to-day operations, while the original creditor–debtor relationships remain unchanged. To date, among all custodianship cases in China’s trust industry, there has yet to be a precedent in which risks were fully resolved.

Fu Fangjian, an associate professor at the Lee Kong Chian School of Business at Singapore Management University (SMU), told Lianhe Zaobao that placing AVIC Trust under custodianship is tantamount to “finding two helpers”. These helpers, however, do not provide a full guarantee; rather, their role is to assist in recovering assets from the relevant projects. As for how much can ultimately be recovered, he said that “the outlook is probably not optimistic”.

Before AVIC Trust was placed under custodianship, its largest shareholder, AVIC Investment, saw its parent company AVIC Industry-Finance Holdings announce a voluntary delisting at the end of March last year, becoming the first central state-owned financial holding company to delist. Some market participants believe this move could be seen as an attempt by a central SOE to ring-fence risks.

Such “risk separation” dates back to an earlier restructuring of China’s trust industry. After reforms to the trust system in 2007, the China Banking Regulatory Commission encouraged trust firms to move out of Beijing and register across the provinces. AVIC Trust registered in Jiangxi in 2009 under this policy, joining peers such as Zhongyuan Trust in Henan and Xinhua Trust in Chongqing.

Registering at the provincial or municipal level meant AVIC Trust was not subject to direct day-to-day supervision by local financial regulators. For central SOEs, this structure also limited detailed micro-level oversight despite nominal local supervision. Shen Meng, a director at Chanson & Co., said this gave local entities considerable autonomy, encouraging trust firms to pursue high-risk, high-return projects driven by their own interests.

Shen said, “When business runs smoothly, central and local parties coexist without friction. But once risks are exposed, central SOEs tend to argue that sufficient autonomy has been granted, and thus move to cut off those risks.”

Meanwhile, the Chinese trust industry’s long-standing role as “financing conduits” also risks sudden defaults. Even projects approved by state-owned trust companies are not immune to such risks.

In Singapore, trust companies are generally understood as wealth management institutions that provide asset management services to clients and charge management fees. In China, by contrast, trust companies more often act as financing intermediaries, extending loans to property projects, local government financing vehicles and businesses. They become a major alternative source of financing outside the banking system — commonly referred to as “shadow banking”.

When companies or institutions are unable to obtain low-interest loans from banks, they turn instead to trust companies for financing. Trust companies earn higher interest in return while bearing the risks associated with these projects.

A product list from AVIC Trust seen by Lianhe Zaobao shows that products with overdue payments have tenors ranging from three to 24 months, with yields of between 5% and 7%, varying according to the amount invested.

However, the interest earned by trust companies from underlying projects may be far higher than the returns received by investors. Shen noted that the cost of channel financing is typically around 15%, but as multiple parties with vested interests are involved, returns are steadily skimmed off at each intermediary layer. As a result, investors who bear the risks often receive relatively modest yields.

Shen elaborated that those able to bear financing costs of around 15% are often property developers with high leverage and rapid turnover. This is why, over the past few years, as the property market slumped and developers’ funding chains collapsed, the risks are gradually passed on to trust companies.

Since the bankruptcy and liquidation of New China Trust in 2023, other trust companies that have faced defaults or payment issues include Zhongrong Trust, Minsheng Trust, Minmetals Trust and Ping An Trust.

By the end of 2023, AVIC Trust’s total assets exceeded 630 billion RMB. According to Bloomberg Economics, the trust industry manages a vast amount of assets — nearly 10% of China’s total loans.

On 15 January, the National Financial Regulatory Administration held its 2026 regulatory work conference, stressing the need to focus on addressing existing risks and to “strictly hold the bottom line of preventing major financial risks”.

Shen pointed out that the main business types and models of Chinese trust companies are similar to those of AVIC Trust. “Amid the economic downturn, AVIC Trust’s collapse is neither the first nor will it be the last,” he said.

Meanwhile, SMU’s Fu thinks that the central authorities have yet to intervene, perhaps because AVIC Trust’s defaults have not risen to the level of systemic risk. However, “once they actually reach that point, the central government may still step in. For now, the risks are manageable, and the central authorities would still want to spend money where it matters most.”

As China’s anti-corruption drive in the defence industry and financial sector deepens, with senior officials falling in quick succession and frequent personnel reshuffles, the reality of “new officials refusing to take responsibility for old problems” has objectively made it more difficult to resolve AVIC Trust’s issues.

On the defence industry front, Tan Ruisong, former party secretary and board chairman of AVIC, was placed under investigation in August 2024, expelled from the Chinese Communist Party in February the following year, and arrested six months later on suspicion of embezzlement and bribery. AVIC’s general manager Hao Zhaoping and deputy general manager Yang Wei were also dismissed in January last year.

Previously, Yao Jiangtao, former chairman of AVIC Trust, and Wei Yinghui, former deputy general manager, were also investigated for serious disciplinary and legal violations. Yao Jiangtao was the company’s first general manager after its establishment in 2009, and had also served as AVIC’s chief economist and chairman of AVIC Industry-Finance.

Against the backdrop of an intensified anti-corruption campaign, AVIC itself is already under considerable strain. Coupled with the fact that it had previously granted AVIC Trust a high degree of operational autonomy, it is now even less willing to bail out the trust business, slowing progress on risk disposal.

AVIC Trust is also one of China’s Sino-foreign joint venture trust companies. At present, AVIC Investment holds 84.42% of the shares, while OCBC owns 15.58%.

In response to queries from Lianhe Zaobao, OCBC said that, as a minority investor in AVIC Trust, the bank has no management or operational control over the company.

This article was first published in Lianhe Zaobao as “中航信托投资者维权持续  再揭中国影子银行系统性风险”.

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