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Troubled China shadow bank Zhongzhi files for bankruptcy



Troubled China shadow bank Zhongzhi files for bankruptcy​

Troubled China shadow bank Zhongzhi files for bankruptcy

Shadow banks like Zhongzhi are loosely regulated firms that pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. Photo: Bloomberg

Chinese shadow banking giant Zhongzhi Enterprise Group Co. filed for bankruptcy, cementing the rapid downfall of a firm that oversaw more than US$140 billion ($186.36 billion) at its peak before succumbing to the property crisis that has wreaked havoc on the world’s second-largest economy.

Zhongzhi said it “obviously” lacked the ability to repay its debts, according to a statement Friday from Beijing’s First Intermediate People’s Court, which accepted the case. An audit found Zhongzhi’s debts total 420 billion yuan to 460 billion yuan ($86.17 billion), compared with assets of 200 billion yuan, according to a letter to investors in November.

The downfall marks one of China’s biggest-ever bankruptcies, putting more stress on already fragile consumer and investor sentiment. The property slump, weak domestic demand and sluggish trade are all weighing on the economy, while its benchmark stock index has plunged three years in a row.

The Zhongzhi filing came just months after the lending giant first triggered concerns in the financial markets when one of its trust-company affiliates failed to repay customers on high-yield investment products, sparking protests in Beijing.

While the firm’s creditors are mostly wealthy individuals rather than financial institutions — limiting the direct impact on the financial system — the collapse exposes potential cracks in the US$2.9 trillion trust sector amid a worsening property slump. The failure also highlights the risks of the rapidly growing global private credit market, where the lack of public disclosure on debts raised outside the banking system is one of its defining traits.

In recent years, even as rival trusts pared risks, Zhongzhi and its affiliates, especially Zhongrong International Trust Co., extended financing to troubled developers and snapped up assets from companies including China Evergrande Group. China’s housing market continues to flounder despite a slew of incentives from Beijing to revive sales, which plunged 35% in December from a year earlier. Sales have now dropped in 20 of the last 24 months.

“The persistent decline in the real estate market, coupled with stringent policies and increased financial anti-corruption measures, has hindered timely asset collection,” said Zhao Jian, head of the Atlantis Financial Research Institute in Beijing, who estimates more than half of the group’s assets are linked to real estate. “Redeeming these assets has become exceedingly challenging.”

The filing also underscores Beijing’s unwillingness to bail out struggling financial firms. China Evergrande is among several high-profile developers that have defaulted in recent years amid the real estate crisis, with little support from the Communist Party government.

As recently as August, China had asked two of the nation’s biggest financial firms to examine the books of Zhongrong International, potentially paving the way for a state-led rescue of the troubled shadow lender, people familiar with the matter said at the time.

See also: DBS ups stake in Shenzhen Rural Commercial Bank Corporation to 16.69%

A twice-a-decade financial policy meeting attended by President Xi Jinping at the end of October stressed the need to effectively prevent financial risks and crack down on any illegal financial activities. In a following study session, the banking regulator, which also oversees trust firms, vowed to use “strong medicine” to tackle major risks.

In November, Chinese authorities said they opened criminal investigations into the money management business of the Zhongzhi group. The firm earlier revealed a shortfall of US$36.4 billion on its balance sheet, telling investors it was “severely insolvent.” At the time, lawyers and analysts estimated more than three quarters of investor cash would be lost, with just 100 billion yuan recovered from debt of as much as 460 billion yuan.

Zhongzhi’s filing is also unusual in that China’s highest-profile debt failures in recent years have tended to go through debt restructurings first, avoiding formal bankruptcy. HNA Group Co., the conglomerate that collapsed with billions of dollars of debt, completed its restructuring work in 2022. China Evergrande, whose default in 2021 accelerated the country’s property debt crisis and which has some US$327 billion of liabilities, is still struggling to avoid liquidation and hasn’t filed for bankruptcy.

Shadow banks like Zhongzhi are loosely regulated firms that pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. China’s trust industry is a key alternative funding source for weaker borrowers unable to get regular bank loans such as real estate developers and local government financing vehicles. China has been cracking down on shadow banking since late 2017.

Founded in 1995, Beijing-based Zhongzhi has expanded into a sprawling empire that had more than 1 trillion yuan in assets at its peak. The group holds shares in six licensed financial institutions including Zhongrong International Trust, five asset managers as well as four wealth management firms, according to its website. It also has controlling stakes in a string of listed firms across sectors from semiconductors to health and consumption.

The firm said in November that the death of its founder Xie Zhikun in 2021 and the subsequent departure of senior executives had led to a failure of internal management. Previous efforts at a “self-rescue” didn’t live up to expectations, Zhongzhi said in the letter.

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Alfrescian (Inf)
Things will become fun when the CCP regime no longer has money to pay its police and military. :cool:

30 days of visa-free travel to China? Wouldn't even go there now even if you paid me to do so. :sneaky: