Zhongzhi, one of China’s major shadow banks, declares itself ‘severely insolvent’

The Chinese trust sector has once again set off alarm bells with the announcement that Zhongzhi Enterprise Group is declaring itself “severely insolvent.” The Beijing-based conglomerate has reported that it faces a shortfall of 260 billion yuan, the equivalent of $36 billion, and has warned of the risk that this poses to normal operations.

Zhongzhi is one of China’s largest shadow banks, private groups that provide financing through non-traditional institutions, such as trust firms and wealth management funds. Zhongzhi invests much of its investors’ money in real estate projects. The group’s situation, which has gotten gradually worse since the summer, once again underscores the liquidity problems in the Asian giant’s shadow banking sector, which is worth an estimated $2.9 trillion.

Late on Wednesday, Zhongzhi acknowledged in a letter addressed to its investors and seen by the South China Morning Post that its total liabilities were up to 460 billion yuan ($65 billion), against assets of 200 billion yuan. At its peak, this wealth management firm was handling more than one trillion yuan in assets.

The company said in its letter that its assets are concentrated in debt and equity investments and, because they have a long duration, collection is difficult, the expected recoverable amount is low, liquidity is exhausted, and asset impairment is serious.

Zhongzhi attributed the huge deficit to the “internal management [of the firm],” which is now “largely out of control” following the departure of key executives after the death in December 2021 of Xie Zhikun, the company’s founder, who played a fundamental role in the group’s decision-making. “A series of attempts have been made to bail the troubled company out, but they all fell short of expectations. We sincerely apologise to all the investors,” said the letter.

Formal complaints

The first signs of Zhongzhi’s weakness emerged in August, when its investment subsidiary, Zhongrong International Trust, defaulted on a series of high-yield investment products. That default fueled concerns about possible contagion to the Chinese real estate sector, which represents approximately a quarter of the country’s economy. On Thursday, numerous retail investors in the company filed formal complaints with the authorities in Beijing, according to the Financial Times.

“The finance sector’s fortunes are closely related to the property sector due to the big developers’ high gearing ratio,” said Ding Haifeng, a consultant at the financial advisory firm Integrity, in statements to the South China Morning Post.

The Zhongzhi financial crisis adds to the instability in the Chinese real estate market. The storm broke out in 2020, when the government approved a series of restrictions to control debt levels in the sector. But the defaults that have occurred since 2021 by key developers (such as Evergrande and Country Garden) have hampered the growth of the second largest economy on the planet and have shaken global markets.

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