NEW YORK – One of China’s largest private wealth managers has defaulted on payments on several high-yield investments, sparking new fears about the health of the country’s shadow banking industry.
The turmoil at China Zhi Enterprise Group, a clandestine financial conglomerate managing about 1 trillion yuan (US$138 billion), came to a head when several of its clients revealed delinquency in payments by their trust division. In a sign that Chinese authorities are concerned about a possible outbreak, the banking regulator has set up a task force to investigate the risks at Chinazhi Bank, according to people familiar with the matter.
Little known outside of China, Zhongzhi is one of the largest players in the country’s $2.9 trillion trust industry, combining features of commercial and investment banking, private equity and wealth management. is. Companies in this sector pool savings from wealthy households and corporate clients to provide loans or invest in real estate, stocks, bonds and commodities.
Chinese trusts have been under pressure for years since regulators began cracking down on China’s shadow banking excesses in 2017. However, Zhongzhi’s difficulties have surfaced at a particularly sensitive time for investors, many of whom are already concerned about the situation at the world’s second-largest financial institution. The largest economy and its real estate market.
One of the country’s biggest developers, Country Garden Holdings, is in danger of defaulting on its loans, and last month Chinese bank lending fell to its lowest level since 2009 in signs of weakening demand from businesses and consumers. fell into. Zhongzhi’s trust arm last year bought stakes in real estate projects in bets on a market recovery, but so far it hasn’t materialized.
A combination of risks has increased investor confidence in Xi Jinping’s government. Chinese stocks fell on Monday as the CSI 300 index fell for the fifth time in six sessions and the renminbi fell toward year lows.
Markets were somewhat relieved by the news of the China Zhi Task Force, but analysts at JPMorgan Chase & Co. warned that the turmoil could set off a “vicious cycle” for China’s real estate finance.
Shen Meng, director of Beijing-based Shanson & Co., said: “The biggest question now is how to isolate the risks associated with the Zhongzhi Group so that the trust industry as a whole does not crumble. Kada,” he said. As the situation continues to deteriorate, the magnitude of the risk is expected to be similar to that of a major property developer defaulting. ”
A total of 106 trust products worth 44 billion yuan had defaulted by July 31, according to data provider UseTrust. Real estate investment accounted for 74% on an amount basis.
The three companies said late Friday that they had not received payments for products issued by Zhongrong International Trust and other companies affiliated with Zhongzhi. Based in Beijing, Zhongzhi was founded in 1995 by Xie Zhikun, who built the company into a vast empire. Xie died of a heart attack in 2021, just as the coronavirus and pandemic lockdowns slowed China’s economy and increased volatility in capital markets.
Liu Yang has vowed not to change the company’s strategic focus of focusing on industrial and wealth management businesses, but the economic slowdown and sluggish real estate market are weighing on the company’s operations.
Zhongzhi is Zhongrong Trust’s second largest shareholder with an ownership interest of approximately 33%. The conglomerate also holds shares in five other licensed financial companies, including a mutual fund manager and two insurance companies, and invests in five asset management companies and four wealth units, according to its website. there is He also manages listed companies and within the industrial business he owns coal reserves of 4.5 billion tons.
According to Use Trust data, Zhongrong Trust alone has 270 products with a total of 39.5 billion yuan to be launched this year. The average yield on these products reached 6.88% compared to the benchmark one-year deposit rate of 1.5% paid by banks. The trust company has said little about its situation publicly, but said it was aware of forged letters being shared on social media stating that the company could no longer operate.
The company reported these to authorities, according to a statement on its website. In an unverified letter circulating on social media, Zhongzhi’s wealth manager apologized to customers and said the group’s wealth department had decided to delay payments for all products from mid-July onwards. Stated. More than 150,000 investors were involved in the case, with a total investment balance of 230 billion yuan, according to the letter.
A prolonged downturn in China’s property sector has brought hitherto healthy property developers to their knees. The industry is caught in a vicious cycle where failed developers keep home buyers away from buying, which in turn squeezes corporate cash flows. Home sales in July saw their biggest drop in a year.
Gary Ng, senior economist at Natixis, said the payment arrears “show how real estate liquidity problems can have a domino effect on other sectors, including the trust industry.” “It is not surprising that trusts with high property allocations face payment problems.”
The State Financial Supervisory Authority, Zhong Rong Trust and its parent company Zhong Zhi Group did not respond to requests for comment. In a statement Friday evening, Nacity Property Service Co. and KBC Corp. first announced the news of late payment by Zhongrong International Trust. Carbon products maker KBC said in a statement to the Shanghai Stock Exchange that the payment delays were related to its 60 million yuan investment in Zhongrong Trust.
Another publicly traded company said on Friday it would take legal action to recover investment losses after payments for certain high-end products it purchased from Zhizhi were past due this month.
Chung Rong Trust, which has 786 billion yuan of assets under management as of December 31, said in its annual report that liquidity pressures and refinancing difficulties among its counterparties are undermining its ability to make payments. of businesses face a “relatively high level” of credit risk. 1 year. Real estate accounts for 11% of Chuei Trust’s assets in trust, followed by the industrial sector at 42% and financial institutions at 33%, according to its annual report.
The company had previously been fined 200,000 yuan by regulators for investing in real estate projects that lacked relevant approvals, and promised to improve compliance. Trust companies such as Zhongrong Trust and MinMetals Trust Co purchased stakes in at least 10 real estate projects last year, with some of the $230 billion in real estate-backed funds they issued to investors in cash that could eventually be repaid from unfinished homes. bet that you will get .
China’s benchmark CSI300 index fell 0.7% on Monday, while Hong Kong’s Hang Seng China Enterprises Index fell 1.6%. The yuan fell 0.2% against the US dollar.