Zhongzhi is a major player in the $3 trillion shadow banking sector operating in China
Zhongzhi Enterprise Group, a leading wealth manager based in Beijing, opened up to its investors about its insolvency issues. With over $64 billion in outstanding liabilities, it has raised a white flag posing a threat to the entire country’s economy.
It mentioned in the letter to its shareholders that it holds assets worth 200 billion yuan ($24.54 billion) against the liabilities amounting to 460 billion yuan ($64 billion).
The first sign of troubles came to light in the early summer of this year when one of its trust companies, Zhongrong International Trust Co., missed the installments for several investment products. Zhongrong largely held real estate investments in its portfolio.
Zhongzhi is a major player in the $3 trillion shadow banking sector operating in China. This shadow banking sector functions separately from the regulations that apply to the traditional banks. This industry is focused on selling wealth management products to retail investors. This financing further fuels property investments.
The property market has recently faced a liquidity crisis when the government imposed a limit on debt levels for real estate developers. This property crisis took the whole Chinese economy for a tour of the south. Now, Beijing has huge ghost cities, millions of unfinished houses, and homebuyers refusing to pay mortgages for under-construction units.
Zhongzhi’s investments are spread across mining to wealth management. It said in the letter that its asset base is mainly saturated in equity instruments and long-term debts, neither of which can be sold off immediately to repay debts.
An investor in a Zhongrong trust product who wished to be anonymous for security concerns said that internal inspections revealed that the group has a massive hole and continuing operations can be at risk. The currently available resources to be liquidated for repayments in the near term are way minute in comparison to the amassed debt pile.
Nomura, a Japanese bank, stated in their report that in March, over 7% of the value of Zhongzhi’s trust funds were invested in property deals. The share amounts to 1.13 trillion yuan. However, Nomura expects the number to be far bigger owing to the lack of transparency in the sector.
There are talks that Zhongzhi might have hired one of the Big Four accounting firms to conduct an audit. Its management told its investors in a meeting in August that they were also looking for strategic investments to stay afloat.
Xing Zhaopeng, a senior analyst at ANZ, said that Zhongrong Trust has most of its money parked in the real estate sector, which is on the verge of a default. Henceforth, the company is unable to liquidate its property investments. This has also created huge discounts on assets nationwide.
Zhongzhi’s website says that they debuted with timber and real estate trades back in the 1990s and rapidly forayed into various businesses like chipmaking, energy vehicles, healthcare, and finance. The financial businesses consist of trusts, asset management, insurance, and wealth management.
The Chinese government stepped up to mitigate the property crisis when the country’s largest real estate company, Country Garden, defaulted on repayments last month. Beijing has advised the traditional banks to lend support to the top 50 developers, but there has yet to be an official announcement.
Financial regulators will most likely intervene aggressively if they see Zhongzhi having a domino effect on other sectors, said Christopher Beddor, the deputy director of China research at Gavekal Dragonomics.
Beijing is supposed to intervene again before Zhongzhi’s situation deteriorates further. Some experts even state that the government might not intervene as the trust industry accounts for only 5% of the total financial sector. Zhongzhi won’t affect the general public as well because most of its creditors are wealthy individual investors.