China: Risk Management for China's Real Estate Pooled Investment Funds (Part I of II)

Last Updated: 18 January 2012
Article by You Yang and Lin Kaiyi King

A real estate pooled investment fund ("RE Pooled Fund") is where trust companies raise funds from investors (who act as both "settlors" and "beneficiaries" in the trust) and work with real estate developers to provide beneficiaries with profits in return. RE Pooled Funds generate returns through specific assets, equity investments, loans, or a hybrid thereof.

With housing purchase restrictions being implemented in China's major cities, real estate developers working with trust companies are facing serious cash flow pressure and some of them have even experienced operating difficulties. When real estate developers are unable to provide trust companies with high investment returns on schedule, and investors continue to hold expectations of high returns regardless of investment risk, trust companies are inclined to pay investors at their own expense and solve investment return problems with real estate developers internally rather than disclose investment risk to the investors. This is partly because trust companies value their reputation and the reputation of their investment products and want to avoid upsetting trustees and commercial banks who engage in selling the trust company's products. Trust companies may also be concerned about the potential for class-action lawsuits by investors. However, such trust companies may one day be unable or unwilling to pay investors out of their own pockets, or investors may no longer be satisfied with being paid investment returns, leading to a very unsustainable situation.

I. Risk Control for Real Estate Trust Products

A. Common Risk for Real Estate Trust Products

a. Policy risk

Real estate trust products have to manage real estate and finance policy changes as such products are closely bound to the real estate industry. For real estate, the central government has tightened control of real estate financing, housing purchase and loan restrictions as well as increased the rate of low-income housing construction. All these policies will indirectly aggravate cash flow problems and increase compliance risks. In the financial industry, the China Banking and Regulatory Commission ("CBRC") has shown a willingness to exercise tight control and close supervision of balances of the top 20 trust companies. Until recently, CITIC Trust, Ping An Trust, ZRT Trust and 20 other trust companies have called off real estate trusts. A People's Bank of China news release reported that the Industrial and Commercial Bank of China and the China Construction Bank have issued circulars to suspend real estate trust business while the Agricultural Bank of China and the Bank of China have halted real estate trusts in practice.

Therefore, policy-oriented effects are a strong distinguishing factor for real estate trusts as any policy changes will affect creation, implementation and termination of real estate trusts.

b. Implementation risks

i. Risks for real estate project

In real estate development and construction, there are potential risks caused by policy changes or circumstance changes in the whole process of land use right acquisition, project examination and approval, construction, acceptance of a completed project, sales and so on. Possible loopholes are listed below: (1) Developers cannot get relevant licenses as planned; (2) Construction is delayed for geological reasons leading to high project cost; (3) Final acceptance delayed for construction contract disputes or construction quality problems; and (4) Sales unsatisfactory due to inaccurate project positioning.

Admittedly, real estate development is a comprehensive industry, and can be both a commercial activity and a practical science. It is difficult to anticipate when and where potential risks will appear, thus trustees and trust companies had better know in-depth understanding about the real estate industry and the specific project.

ii. Liquidity risk

Assets held by China's real estate developer are mainly land, real estate and other long-term investments. Such asset structures could easily result in cash flow issues and liquidity risks, which may lead to fundamental breaches due to delayed payment of investment returns.

There are two options left for trust companies, they could continue funding the project (at their own expenses or setting up new trust product), or quit the trust project (disposing property and withdrawing capital). Either option will lead to risks and challenges.

iii. Increasing cost or diverting funds

Increasing cost and diverting funds are common ways to breach the contract as project profits are the main source for investment returns. Trust companies are seeking control risk by ways of setting up supervision accounts, transferring funds according to project schedules, assigning superior executives and accountants, controlling official seals, and so on.

However, trust companies are not professional real estate institutions, and employees are unlikely to have sufficient real estate knowledge and sensitivity. Therefore, it is difficult for trust companies to identify fictional cash flows or false contracts for the sake of increasing costs and diverting funds. Even worse, capital supervision may get out of control due to the neglect of administrators' duties and inadequate supervision procedures.

c. Unusual trust plan termination

Trust plans terminate in an unusual way due to the early termination clause stipulated in a trust contract. Trust companies will announce the termination, withdraw capital and distribute to beneficiaries. Potential risks are hidden in this process:

i. Related provisions are not specifically stipulated in the contract

Trust contracts and trust product introductions may not specify or enforce over key provisions. Trust companies have to specify provisions with respect to actual situations and negotiate with real estate developers, ensuring that the trust contract is enforceable and dispute resolution is the ultimate legal remedy.

ii. Legitimacy review

Upon undergoing dispute resolution, legitimacy review for trust plan is the foremost procedure (though many parties, judges and arbitrators are unaware of this). If the trust plan is declared to be invalid, the trust companies not only cannot get profits from the trust plan, but also should bear contracting negligence responsibility.

iii. Evidence

Upon undergoing dispute resolution, trust companies and real estate developers will inevitably commit to a burden of proof in order to distinguish responsibilities. If the trust companies fail to present contracts, financial vouchers, correspondence and related documents, it will lead to a disadvantage position or cause allegations of negligence of duty against the trust companies.

iv. Loopholes in legal system

China's laws and regulations are in the process of continuous improvement and there are disputes in practice that trust companies are confused with in dealing with trust property. For example, enforcement notarization for payment agreement/guarantee agreement is stipulated in most trust plans to avoid litigation and arbitration. However, there is no specific provision for enforcement of notarizations in China's legal system, so courts may dismiss enforcement in judicial practice.

v. Long dispute resolution period

Many factors affect dispute resolution efficiency: hard or easy cases, the parties' influence, the dispute resolution institution's efficiency, attention by the authorities, market factors and so on. A relatively long dispute resolution period may result in deflated assets or impossible investment returns due to changing market or policy risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.