Zhongzhi Enterprise Group, Major Shadow Bank in China, Faces Insolvency Crisis

One of China's largest shadow banks, Zhongzhi Enterprise Group, has issued a warning to investors, revealing its inability to repay debts and triggering concerns in the trust sector.

The Beijing-based wealth management company disclosed that its total liabilities have surged to between 420 billion yuan (US$59 billion) and 460 billion yuan, while tangible assets stand at just 200 billion yuan, indicating a potential shortfall of up to 260 billion yuan. Zhongzhi stated that it is "largely out of control" following the death of its founder, Xie Zhikun, in December 2021, and subsequent resignations of key executives.

The company admitted that it is severely insolvent and faces high risks of sustaining normal operations. It cited poor liquidity in its long-dated investments as a reason for the low recovery value of its assets, creating a shortage of resources to meet near-term obligations. The insolvency crisis at Zhongzhi comes amid the broader property crisis in China, with major developers such as China Evergrande Group and Country Garden Holdings facing financial difficulties as real estate sales decline and cash flows dry up. Many trust products, including those offered by Zhongzhi, had heavily invested in real estate projects.

“The finance sector’s fortunes are closely related to the property sector due to the big developers’ high gearing ratio,” said Ding Haifeng, a consultant at Shanghai financial advisory firm Integrity. “A collapse of the real estate sector will absolutely lead to a wave of bad assets in banks, trust firms and insurers.”

China's property sector, which accounts for about a quarter of the country's economy, has been grappling with challenges, leading to a series of defaults by major developers. Beijing's clampdown on the property market, including the introduction of the "three red lines" policy in August 2020 to reduce developers' leverage, has contributed to the financial woes of companies like Evergrande and Country Garden. The recent arrest of Hui Ka-yan, the founder and chairman of Evergrande, further indicates deep-seated concerns in Beijing over the financial stability of companies managed by wealthy individuals and their potential impact on China's financial system and social stability. The insolvency crisis at Zhongzhi adds to the challenges faced by China's financial sector amid the ongoing property downturn.

Zhongzhi's troubles were initially highlighted in August when its subsidiary, Zhongrong International Trust, failed to repay investors who had purchased its high-yielding investment products. The disclosure of its insolvency and the magnitude of its financial challenges have raised concerns in the broader financial market, particularly among investors who trusted the shadow bank with their funds.

Zhongzhi's situation underscores the interconnectedness of the financial and real estate sectors in China, with the fate of shadow banks closely tied to the performance of major property developers. The government's efforts to address the challenges in the property market and prevent systemic risks will likely continue to impact various segments of the financial industry in the coming months.

By fLEXI tEAM