BackChina Scrambles to Contain a Looming Shadow-Bank Meltdown
Chinese authorities are taking more forceful action to contain the growing financial troubles of one of the country’s biggest shadow lenders.
PremiumChinese authorities are taking more forceful action to contain the growing financial troubles of one of the country’s biggest shadow lenders.
Police in Beijing said over the weekend that they had taken “criminal coercive measures"—a euphemism for arrests—against multiple employees of Zhongzhi Enterprise. The privately held conglomerate operates several businesses that sold investment products to many wealthy individuals and companies in China, and has struggled for months to make promised payments to investors.
The police probe is an escalation of China’s response to the problems at Zhongzhi, which last week said it was insolvent and had at least $31 billion more liabilities than assets. Zhongzhi said it had been highly dependent on the decision-making of Xie Zhikun, its founder and largest shareholder, who died in December 2021.
Over the summer, Zhongrong International Trust, which is part of the group, defaulted on many of its high-yielding investment products and fueled fears of financial contagion from China’s worsening property downturn. In September, two large state-owned financial institutions stepped in to provide assistance to Zhongrong, which had around $108 billion of assets under management at the end of 2022.
Zhongzhi is on the brink of becoming one of China’s biggest corporate failures in years. The firm’s collapse could deal a major blow to investor confidence at a time when China’s economy is still struggling to return to health and its stock market is languishing.
Investors who bought Zhongzhi products have gathered in social-media groups and in person over the past few weeks and tried to figure out ways to pressure the conglomerate to repay them, according to people familiar with the matter.
At one recent protest, dozens of people hung banners and shouted slogans such as “Zhongzhi, return us our money!" and “contract fraud!," according to a video seen by The Wall Street Journal.
In a social-media post on Saturday, a branch of the Beijing police department asked investors to come forward to report their losses. But some investors said they were reluctant to do so since they might get implicated in the process, and felt they weren’t likely to get most of their money back.
Zhongzhi last week said it has liabilities of $59 billion to $64 billion, and assets of $28 billion. The total amount it owes could be far larger because the company didn’t include off-balance sheet liabilities in its calculation, said Zerlina Zeng, a senior analyst at CreditSights, a research firm.
“The recovery rate for investors will be very, very low," said Zeng.
Chinese businesses have lost money, too. Since August, at least 17 publicly listed companies in mainland China have said in stock-exchange filings that they didn’t receive interest or principal payments on products managed by Zhongrong. Those missed payments add up to the equivalent of $153 million.
In September, police in Shenzhen took similar actions against the wealth-management unit of China Evergrande. The property developer and its subsidiaries had raised around $13 billion by selling investment products to domestic investors. After Evergrande slid into financial distress in 2021, it struggled to make payments on them.
Zhongzhi caters mainly to wealthy investors, typically requiring its clients to invest the equivalent of at least $420,000 in its products, according to marketing documents for several funds seen by the Journal. The firm offered annual returns of around 7% to 8% last year, the documents show. There were few limits on what these funds could invest in.
China’s sprawling trust industry, which had more than $3 trillion in assets under management at the end of June, has long been a source of financial support for property developers.
The property slump could pressure more trust companies, said Xiaoxi Zhang, an analyst at Gavekal Research. However, as the trust sector is still relatively small compared with China’s financial system, any broader spillover is likely to be limited, she said.
Write to Rebecca Feng at rebecca.feng@wsj.com and Weilun Soon at weilun.soon@wsj.com
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