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In China, a Real Estate Bust Threatens Investment Trusts

A real estate bust may push shadow lenders into default
Chinese savers helped fund construction of Kangbashi, the cultural district of Ordos, where buildings now sit empty
Chinese savers helped fund construction of Kangbashi, the cultural district of Ordos, where buildings now sit emptyPhotograph by Christopher Brown

In the U.S. housing crisis, investors lost billions by buying into complex derivatives backed by subprime mortgages. In China’s version of the real estate bust, it’s a plain-vanilla financial product known as a trust that has been around since the 1970s that threatens to wreak havoc.

These investments that pool savings are at the center of a housing bust playing out in Ordos. The city of 1.9 million in Inner Mongolia, rich in coal and cashmere, is dotted with unfinished real estate projects. Among the more than 1,000 that have ground to a halt is the Purple Palace, a residential complex that contains a luxury hotel. Dozens of investors from across China put 445 million yuan ($71.2 million) into a trust to fund its construction. The sales prospectus promised an annual interest rate of at least 10 percent and return of principal by March 2013. The issuer, New China Trust, did not mention that work on the project had been halted for more than six months when it updated investors in October. The company didn’t respond to calls seeking comment, and a contact number for the developer, Ordos Jin’ao Property Development, couldn’t be located. An official who declined to give his name at Ordos Jinshan Property Development Group, identified in the prospectus as a former shareholder of the project, confirmed the project is on ice.