One of China’s top wealth managers, Zhongzhi Enterprise Group told investors it is heavily insolvent with up to $64 billion in liabilities, threatening to reignite concerns that the country’s property debt crisis is spilling over into the broader financial sector. The firm, which has sizable exposure to China’s real estate sector, apologized to its investors in a letter that said it had total liabilities of about 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion).
The liabilities of Zhongzhi are estimated to be around 200 billion yuan, as stated in the letter seen by Reuters on Wednesday. Zhongzhi, based in Beijing, has not yet responded to a request for comment from Reuters. The deteriorating situation at Zhongzhi, a significant player in China’s $3 trillion shadow banking sector, which is roughly equivalent to the size of the French economy, is likely to raise concerns about contagion. However, some analysts anticipate regulators will intervene to prevent a broader impact.
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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.
The 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 apologizes 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.
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.
ANZ’s senior China strategist, Xing Zhaopeng, stated that most of Zhongrong Trust’s underlying assets are related to property, which carries a high risk of default. “The company cannot get the money back amid the property woes. So there are big discounts to its assets.”
Zhongzhi began its journey in the 1990s with timber and real estate trades. Over the years, as stated on its website, it has diversified its portfolio into various industries including chipmaking, healthcare, new energy vehicles, and finance. In addition to these ventures, Zhongzhi offers multiple financial services such as 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,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.
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 be turning their backs on years of attempts to undermine implicit guarantees. I suspect they won’t.”
