China

China Wealth Manager Zhongzhi Admits to $64 Billion in Liabilities

 

Zhongzhi Enterprise, a large wealth management group in China, has informed investors that it is insolvent.

The Beijing-based group, which had significant exposure to the real estate sector, has massive liabilities of up to $64 billion.

This has led to concerns that the country’s property debt crisis is spilling over into the broader financial sector.

The firm apologised to its investors in a letter on Wednesday that said it had total liabilities of about 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion).

The liabilities compared to Zhongzhi’s estimated total assets of about 200 billion yuan, according to the letter, which was seen by Reuters. Zhongzhi did not immediately respond to a request for comment.

 

ALSO SEE: Big Tech ‘Doing Little’ to Counter Rampant Scams on Social Media

 

The worsening woes at Zhongzhi, a major player in China’s $3-trillion shadow banking sector – roughly the size of the French economy – is set to rekindle worries about contagion, though some analysts expected regulators to step in to stem a wider fallout.

China’s highly indebted property sector has been reeling from a liquidity crunch since 2020. Defaults by developers since late 2021 have impeded economic growth and rattled global markets.

Shadow banking-linked wealth managers in China typically operate outside many of the rules governing commercial banks and mainly channel the proceeds of wealth products sold to retail investors to real estate developers and other sectors.

 

Assets in long-term debt, hard to liquidate

Signs of trouble at the Zhongzhi group first came to light in July when Zhongrong International Trust Co, a leading trust company controlled by Zhongzhi, missed payments on dozens of investment products.

“The hole in its books is enormous,” said Xu, who is an investor in a Zhongrong trust product and gave only her surname due to the sensitivity of the matter. “The firm has been in a mess.”

Zhongzhi, whose business interests span from mining to wealth management, said in the letter that as the group’s assets were concentrated in long-term debt and equity investments it was difficult to liquidate them and book the returns.

“Initial inspections show that the group is seriously insolvent and has significant continuing operational risks. The resources available for debt repayment in the short term are much lower than the group’s overall debt scale,” it said.

“The Zhongzhi group deeply apologises for the losses caused to investors. We fully understand the urgency, importance and seriousness of resolving this overall risk,” the group said in the letter.

 

High default risks

Zhongzhi had hired one of the Big Four accounting firms to conduct an audit of the firm, and was seeking strategic investors, its management told investors in a meeting in August, according to a video seen by Reuters at the time.

The underlying assets of Zhongrong trust are largely property related, which have high default risks, said Xing Zhaopeng, senior China strategist at ANZ.

“The company cannot get the money back amid the property woes. So there are big discounts to its assets.”

Starting off with timber and real estate trades in the 1990s, Zhongzhi quickly expanded into businesses ranging from chipmaking, healthcare, new energy vehicles and finance, according to its website.

Its financial businesses include trust, asset management, insurance, futures, and wealth management.

Zhongzhi has been selling stakes in some listed companies it controlled over the past few years, and reducing the size of its business, after coming under pressure in the wake of China’s crackdown on shadow banking, and the property market downturn.

“Financial regulators are almost certain to intervene aggressively if there’s any sign that Zhongzhi’s troubles are spreading,” Christopher Beddor, deputy director of China research at Gavekal Dragonomics, said.

He added that the trust industry is only about 5% of the total financial system, so problems there are not necessarily life-threatening.

Beddor said the chance for investors to get full repayment of their investments is minimal. “Officials could certainly make retail investors whole if they want to, but they’d basically be turning their backs on years of attempts to undermine implicit guarantees. I suspect they won’t.”

 

  • Reuters with additional editing by Jim Pollard

 

ALSO SEE:

China’s Private Real Estate Giants Teeter Near Collapse

 

China’s State Help for Zhongrong ‘No Good for Investors’

Struggling Chinese Asset Manager Zhongzhi Looking at Debt Rejig

 

China Trust’s Missed Payments Highlights Slowdown Risks – SCMP

 

China’s $13tn Provincial Debt Crisis Threatens to Spill Over

 

Biden Likens China to ‘Ticking Time Bomb’ Due to Economic Woes

Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years.

Recent Posts

Bitcoin Comeback Sees Market Worth $1 Trillion Again

The globe’s biggest crypto coin has soared 22% in value this year after the US…

10 hours ago

China’s Free Trade Olive Branch to EU Amid Subsidy Probes

Beijing’s Foreign Minister Wang Yi said the EU and China could avoid confrontation through cooperation

11 hours ago

Curbs on ASML ‘to Stop Use of Advanced Chips by China Military’

ASML tools are used to make advanced semiconductors that can go into "high-value weapons systems…

13 hours ago

Chinese Rocket Failure Opened Door for SpaceX in Indonesia

The failure of a Chinese rocket launch in April 2020 gave Elon Musk's SpaceX the…

13 hours ago

Fake Chinese Accounts Flourish on X, Analysis Shows – WaPo

Researchers say Chinese propaganda "has increasingly sought to stoke existing US divisions in the same…

14 hours ago

Hang Seng Lifted by Rate Cut, Nikkei Dips on Tech Worries

China’s markets were slow to react to its biggest ever mortgage rate cut while Tokyo’s…

15 hours ago