Zhongzhi shadow banks pool household savings to offer loans and invest in real estate, stocks and bonds; additionally they provide financing solutions to property developers.
Zhongzhi raised eyebrows last August after one of its trust-company affiliates failed to pay customers on high-yield investment products, prompting concern. Subsequently, Zhongzhi announced it was “severely insolvent,” with debts two times greater than assets.
Zhongzhi Enterprise Group Co.
Zhongzhi’s collapse, with significant exposure to China’s property sector, highlights the risks of shadow banking – lending carried out outside of formal financial systems by trust companies that pool funds from investors before investing them into assets like real estate.
Zhongzhi Bank began experiencing difficulties earlier this year when one of its trust company affiliates failed to make payments on high-yield investment products. Subsequently, Zhongzhi warned it was “heavily insolvent,” leading its stock price to plummet 37% this year.
Zhongzhi Trust was established in 1995 and remains one of the biggest players in China’s $2.9 trillion trust industry, offering non-standard wealth management products such as those discouraged or banned by regulators – many of which resemble Ponzi schemes according to CreditSights analyst Zerlina Zeng. If this trust fails, investors’ faith could further be shaken – particularly those investing in real estate which has seen both boom and bust cycles since 2020 and slumping sales volumes; moreover its failure underscores Beijing’s unwillingness to help save struggling financial firms in need.
China’s debt and property crisis
China’s financial stability and economy is under threat by property developers’ failure to repay debt, with ripple effects expected across other nations. Beijing must step in immediately to stabilize this sector but their policies so far have only compounded the crisis.
China’s shadow banking industry, which offers consumers loans and investment products backed by pooled household savings, has come under scrutiny after Zhongzhi Enterprise Group declared bankruptcy earlier this month due to failed payments on several of their investment products. Estimates place its estimated worth at $12 trillion when asset management products and consumer loans are added together.
Defaults have shaken investor trust in the nation’s property market, which accounts for an important part of its economy. Furthermore, any prolongued property market slump could strain local government finances which play a vital role in supporting the national economy.
Zhongzhi’s bankruptcy
Zhongzhi once held assets worth over $140 billion, underscoring risks in China’s loosely-regulated shadow banking sector, which provides financing to developers and companies such as China Evergrande that do not meet traditional bank loan criteria.
Zhongzhi’s finances were initially brought to the fore in August when its trust company affiliate failed to pay investors on high-yield investment products. By November, however, investors learned the firm was “severely insolvent”, with liabilities totalling up to 460 billion yuan.
Authorities decided in October that bankruptcy would be the best solution to minimize impact on financial markets, according to people familiar with the matter. This decision marked an unprecedentedly rapid solution to an unprecedented debt crisis that had shaken global markets and slowed China’s economy. Most high-profile corporate defaults over recent years have gone through debt restructuring rather than formal bankruptcy filing, showing confidence among Beijing officials that Beijing can minimize damage done to financial markets by doing this.
Bailouts
China’s sprawling, poorly regulated shadow financing market was taken as a warning by the recent collapse of a wealth management trust. For years, Beijing’s practice of bailing out troubled financial firms led many investors to believe that products sold by trust companies – particularly those affiliated with state-owned enterprises – enjoyed some form of government guarantee.
Zhongzhi, once an important market player, revealed its dire predicament this week in a letter sent out to investors by stating it is severely insolvent with debts of nearly 460 billion yuan and assets worth only 200 billion yuan.
Top officials reached the decision in October that bankruptcy liquidation would be the best means of mitigating its effects on financial markets, according to people familiar with the matter. This decision comes less than three months after Zhongzhi and its units defaulted on numerous wealth products sold to customers; prior high-profile failures like HNA Group Co and China Evergrande Group underwent debt restructuring before collapsing.
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