China Shadow Banking Giant Alarms Investors With Missed Payments

(Bloomberg) — One of China’s largest private wealth managers is triggering fresh anxiety about the health of the country’s shadow banking industry after missing payments on multiple high-yield investment products.

Most Read from Bloomberg

Three firms said late Friday they failed to receive payments on products issued by companies linked to Zhongzhi Enterprise Group Co., which has about 1 trillion yuan ($138 billion) in assets under management. One of the companies, Zhongrong International Trust, bought stakes in real estate projects last year, betting on a market rebound that has so far failed to materialize.

The missed payments have put a fresh spotlight on China’s $2.9 trillion trust industry, which combines characteristics of commercial and investment banking, private equity and wealth management. Firms in the sector pool household savings to offer loans and invest in real estate, stocks, bonds and commodities.

While China trusts have faced years of turbulence after regulators clamped down on the nation’s shadow-banking excesses, signs of heightened stress at a major industry player have spooked markets already on edge over the state of China’s economy and property market. One of the nation’s largest developers, Country Garden Holdings Co., is on the brink of default, while loans extended by Chinese banks fell to the lowest level since 2009 last month.

The confluence of financial risks is adding pressure on Xi Jinping’s government to prevent contagion and shore up investor confidence. Chinese stocks slumped on Monday, with the CSI 300 Index extending its biggest loss since October at the end of last week, and the yuan depreciated toward its weakest level this year.

“The biggest problem now is how to isolate the risks associated with Zhongzhi group so that it doesn’t cause confidence of the entire trust industry to collapse,” said Shen Meng, a director with Beijing-based Chanson & Co. “If the situation continues to worsen, expect the scale of the risks to be no less than when a leading property developer defaults.”

The trust industry, once seen a safe place by wealthy Chinese to park their money for hefty returns, has become a growing concern for authorities who have sought to rein in its scope. The industry has been plagued by missed payments in recent past years, in particular on investments related to real estate.

Read more: China Orders Surprise Audit of $3 Trillion Trust Industry

Beijing-based Zhongzhi was founded in 1995 by Xie Zhikun, who built the firm into a sprawling empire. Xie died of a heart attack in 2021, just as Covid-19 and pandemic lockdowns slowed China’s economy and increased volatility in its capital markets. While his replacement Liu Yang vowed to keep the company’s strategic focus on industrial and asset management businesses unchanged, the economic slowdown and the property-market slump have weighed on its operations.

Zhongzhi is the second-largest shareholder of Zhongrong Trust, with its ownership at around 33%. The conglomerate also holds stakes in five other licensed financial firms, including a mutual fund manager and two insurers, and invested in five asset management companies and four wealth units, according to its website. It also controls listed companies and owns 4.5 billion tons of coal reserves among its industrial operations.

Zhongrong Trust alone has 270 products totaling 39.5 billion yuan due this year, according to data provider Use Trust. The average yield on those products amounted to 6.88%, compared with the benchmark 1.5% one-year deposit rate paid by banks.

Forged letters

The trust company has disclosed little to the public about its situation, though it has said it’s aware of forged letters being shared on social media saying the company is no longer able to operate. The firm has reported them to authorities, according to a statement on its website.

In one unverified letter being circulated on social media, a wealth manager at Zhongzhi apologized to his clients, saying the group’s wealth arms have decided to delay payments on all products since mid July. The incident involves more than 150,000 investors with outstanding investments totaling 230 billion yuan, according to the letter.

The prolonged slump in China’s property sector has brought previously sound property developers to their knees. The sector is caught in a vicious cycle where failing developers put homebuyers off purchases, which then crimps cash flow of companies. Home sales tumbled the most in a year in July.

The missed payments show “how the real estate’s liquidity problem can create a domino effect on other sectors, including the trust industry,” said Gary Ng, senior economist at Natixis. “It would not be surprising to see more trusts with a high asset allocation towards real estate face payment issues.”

The National Financial Regulatory Administration, Zhongrong Trust and its parent Zhongzhi Group didn’t immediately respond to requests seeking comment.

Read more: Country Garden’s Losses Fan Fears on China Property Market

Nacity Property Service Co. and KBC Corp. first announced news of the delayed payments by Zhongrong International Trust Co. in statements Friday evening. KBC, a carbon products manufacturer, said in a statement to the Shanghai Stock Exchange that the delayed payments were tied to 60 million yuan invested with Zhongrong Trust.

Another listed company said on Friday that payments on one wealth product it bought from a Zhongzhi unit had become overdue this month and it will take legal measures to recover investment losses.

Zhongrong Trust, which managed 786 billion yuan in assets as of Dec. 31, said its businesses faced a “relatively high level” of credit risks in 2022 as counterparties’ liquidity pressures and refinancing difficulties eroded their ability to honor payments, according to its annual report for the year.

Real estate accounted for 11% of Zhongrong Trust’s trust assets, following 42% in industries and 33% in financial institutions, according to its annual report. The company was previously fined 200,000 yuan by regulators for investing in a property project that lacked relevant approvals, and pledged to improve compliance.

Trust firms, including Zhongrong Trust and MinMetals Trust Co., have bought stakes in at least 10 real estate projects last year, betting that unfinished homes will eventually yield cash to pay off some of the $230 billion in property-backed funds they have issued to investors.

The CSI 300 Index was down 1.3% at the midday break, while the Hang Seng China Enterprises Index tumbled 2.8%. The yuan was 0.3 weaker at 7.258 per dollar.

–With assistance from Qingqi She and Zheng Li.

(Updates to add quotes from fifth paragraph.)