Recently, the subject of discussion on a messaging platform run by the Shanghai Stock Exchange, where investors can ask businesses questions directly, has been a vast financial conglomerate’s delayed payments.
One of the main participants in the trust sector, a $2.9 trillion shadow financing market, is Zhongrong, which is partially owned by investment conglomerate Zhongzhi. Concerns regarding the state of China’s economy, which is still working to recover from the Covid-19 outbreak, are growing as a result of questions about its health.
Last week, two publicly traded companies said Zhongrong had not paid back trust products, which provide investors and businesses with higher returns than traditional banks. This came after weeks of rumors regarding distinct missed payments from Zhongzhi’s wealth management enterprises, which also put billions of yuan into savings products, to retail investors.
Karen Wu, an analyst at CreditSights, claimed that the market was not as frightened when the issue exclusively affected Zhongzhi wealth management companies. “The crisis has actually accelerated” because of Zhongrong.
The Zhongzhi group’s troubles have fueled deeper concerns of spillover effects from a slowdown in the nation’s once-booming real estate market, which has already driven dozens of developers into default, given that shadow financing frequently flows into the property sector in China.
According to a former senior employee of a bank in mainland China, China’s trust industry often “organises capital from companies and individuals” at greater rates than banks can offer. He continued by saying that trust firms in general “are probably overexposed to real estate.”
Data from the China Trustee Association showed that Rmb1.1 trillion ($152 billion) of Rmb23 trillion in trust goods were invested in the real estate sector, according to Xiaoxi Zhang, an analyst at Gavekal consultancy. Given that trust monies were frequently transferred to developers through a number of middlemen, he noted that the actual amount was “probably far bigger.” Additionally, there are no statistics on trust lending to local government funding entities.
Analysts at JPMorgan warned of “a vicious cycle on real estate financing, intensifying liquidity stress for developers and their non-bank creditors” in light of Country Garden, the largest privately held homebuilder in China, missing bond payments last week.
Zhongrong has total assets of Rmb629 billion, of which Rmb67 billion was invested in the real estate market, the researchers continued. They said that there was “no disclosure on the profile of real estate debtors.” “We presume that all debt secured by real estate is in jeopardy.”
The missed payments at Zhongzhi, according to Zhang at Gavekal, were a sign “that debt strains from property developers and local government financing vehicles are spreading across China’s economy” even though regulators had cracked down on shadow banking, including its capacity to finance real estate and its connections to the established banking system.
Beijing-based Xie Zhikun, a rags-to-riches businessman who amassed his wealth through lumber and real estate, created Zhongzhi in 1995. It owned shares in six banking institutions, four wealth management firms, and a variety of other businesses, ranging from mining to new-energy vehicles, by the time of Xie’s passing in 2021. Liu Yang, his nephew and the previous Zhongrong chair, took his place.
Chinese media outlet Caixin estimates that Zhongzhi’s four wealth management firms together own trillions of yuan. These firms have also been the topic of discussion on Chinese social media. An apology letter for late payments from a representative of an investment company connected to Zhongzhi has been widely disseminated online.
An inquiry for comment from Zhongzhi received no response. Zhongrong did not react to a request for comment despite the fact that it claimed this week that criminals had “forged its corporate seal, official letters, and other documents”.
According to two persons who attended, a Zhongrong board member made plain the scope of the issue at an informal meeting with investors last week at Zhongzhi’s headquarters.
The board member informed them that Zhongzhi had stakes in listed businesses, real estate projects, loans, and other property assets in third- and fourth-tier cities. He also stated that three of the four wealth management companies had stopped paying payments in June. Following that, the fourth wealth manager stopped sending payments, according to two investors.
There are hints of a reaction among ordinary investors.
Police were called to the Zhongzhi headquarters in early August as retail investors tried to “resolve” problems with management there. Police and investors on the site both declined to comment on specifics. On Wednesday, small-scale investors attempted to formalize their grievances with Beijing officials.
According to a Zhongrong product investor in Yunnan, he is owed roughly Rmb6 million. “These are all assets that have been worked for. However, I’ve now lost everything,” the investor lamented.
One individual, who requested anonymity, revealed that his parents had financial investments with Datang, one of Zhongzhi’s four wealth managers. They work at a power plant on the east coast of China where “almost 100%” of the staff had made a similar investment. Investors had been informed that payments would be delayed for ten days at the beginning of July, but they had still not received money, he claimed.
The person said, “It is pretty crazy since they felt it was completely safe. There has been no communication with any Zhongzhi employees.
A 12-month product named “Zhongzhi Shicheng” that offers an 8% return on investments up to Rmb3 million is described in a document delivered to Datang investors and obtained by the Financial Times.