Troubled Chinese shadow bank Zhongzhi warns it is ‘severely insolvent’ after asset shortfall, failed bailouts

Zhongzhi Enterprise Group, one of mainland China’s largest shadow banks, has warned investors that it is unable to repay its debts, setting off alarm bells in the trust sector which invests a large portion of investors’ money in real estate projects.

The Beijing-based wealth management company said late on Wednesday its total liabilities had mounted to between 420 billion yuan (US$59 billion) and 460 billion yuan, while its total tangible assets stood at just 200 billion yuan, implying a shortfall of as much as 260 billion yuan.

“Initial results from the due diligence exercise show that the group is severely insolvent and facing high risks of sustaining normal operations,” Zhongzhi told investors in a letter obtained by the Post. “In the near term, the amount of assets that can be used to repay investors is far below the total liabilities.”

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It added that the recovery value of the group’s assets, consisting mainly of long-dated investments, would be low due to poor liquidity, and therefore there was a shortfall in resources available to meet near-term obligations.

Wealth management products are normally designed for depositors with low risk appetite and they are typically invested in fixed-income and monetary market instruments. They are usually offered by trust firms.

It added that the company is “largely out of control” after the death of its founder Xie Zhikun in December, 2021 and subsequent resignations of several key executives.

The logo of Zhongrong Dingxin is seen on the office building of Zhongrong International Trust, a trust company partially owned by Zhongzhi Enterprise Group, in Beijing, China August 22, 2023. Photo: Reuters

“A series of attempts have been made to bail the troubled company out, but they all fell short of expectations,” the letter said. “We sincerely apologise to all the investors.”

Zhongzhi did not respond to the Post’s request for a comment on Thursday.

Chinese trust firm clients say wealth product payout delayed

Zhongzhi, which at its peak controlled more than 1 trillion yuan of assets, displayed first signs of financial troubles in August, when its subsidiary Zhongrong International Trust failed to repay investors who had bought its high-yielding investment products.

Defaults by Zhongzhi surfaced in sync with the mainland’s intensifying property crisis which involved mainland China’s biggest developers such as China Evergrande Group and Country Garden Holdings, as real-estate sales dived and cash flows dried up. Many trust products had invested heavily 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 ailing property sector, along with related industries such as home appliances and construction materials, accounts for about a quarter of the country’s economy.

Developers like Evergrande and Country Garden took the biggest hits following Beijing’s clampdown on the red-hot property market, after the government introduced the “three red lines” policy in August 2020 to reduce developers’ leverage.

Evergrande was saddled with 2.4 trillion yuan of liabilities as of June 30, including 604 billion yuan worth of unfinished homes, according to its first-half earnings report.

Country Garden had 257.9 billion yuan of interest-bearing debt as of June 30, with 603.6 billion yuan worth of unfinished homes due to be delivered to buyers, according to its latest interim report.

On September 28, Hui Ka-yan, founder and chairman of Evergrande, was arrested for unspecified crimes.

His downfall indicates deep-seated concerns in Beijing over the losses at companies managed by some of the country’s super-rich, and their impact on China’s financial system and social stability, according to Chinese analysts.

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