Regulators alert missed payments to the giants of China Finance, Markets

(Bloomberg) — One of China’s largest private wealth managers has raised fresh concern about the health of the country’s shadow banking industry after it missed payments on several high-yield investment products.

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Unrest escalated at Zhongzhi Enterprise Group Co., Ltd. , a secretive financial conglomerate managing about 1 trillion yuan ($138 billion), after several of its corporate clients revealed late payments by a credit unit. In a sign that Chinese authorities are concerned about possible contagion, the bank regulator has set up a task force to scrutinize risks in Zhongzhi, according to people familiar with the matter.

While little known outside of China, Zhongzhi is among the largest players in the country’s $2.9 trillion trust industry, which combines the characteristics of commercial and investment banking, private equity and wealth management. Companies in the sector pool savings from wealthy families and corporate clients to make loans and invest in real estate, stocks, bonds and commodities.

Chinese trust funds have been under pressure for years after regulators began clamping down on the country’s shadow banking excesses in 2017. But Zhongzhi’s difficulties have come at a particularly sensitive time for investors, many of whom are already concerned about the state of the world’s second-largest country. economy and real estate market.

Country Garden Holdings, one of the country’s largest real estate developers, is on the brink of default, while loans from Chinese banks fell to their lowest level since 2009 last month in a sign of waning demand from businesses and consumers. Zhongzhi’s trust unit bought stakes in real estate projects last year, betting on a market recovery that it has so far failed to materialize.

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The confluence of risks adds pressure on Xi Jinping’s government to boost investor confidence. Chinese stocks fell on Monday, with the CSI 300 index falling for the fifth time in six sessions, while the yuan fell towards its weakest level this year. Analysts at JPMorgan Chase & Co have warned that the turmoil in Zhongzhi and Country Garden could create a “vicious cycle” for real estate financing in China.

Shen Ming, director at Chanson & Co., said: “The biggest problem now is how to isolate the risks associated with Zhongzhi Group so that they don’t cause the confidence of the entire trust industry to collapse.” As it continues to deteriorate, expect the stakes to be no less than what happens when a leading real estate developer defaults.”

A total of 106 trust products worth 44 billion yuan defaulted on their debts this year as of July 31, according to data provider Use Trust. Real estate investments accounted for 74% by value.

Three companies said late Friday that they had failed to receive payments on products issued by companies linked to Zhongzhi, including Zhongrong International Trust.

Zhongzhi was founded in Beijing in 1995 by Xie Zhikun, who built the company into a sprawling empire. Xie died of a heart attack in 2021, just as the Covid-19 virus and pandemic lockdowns slowed China’s economy and increased volatility in the capital markets. While replacement Liu Yang pledged to keep the company’s strategic focus on industrial and asset management businesses unchanged, the economic downturn and downturn in the real estate market affected its operations.

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

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

Use Trust data showed that Zhongrong Trust alone has 270 products with a total value of 39.5 billion yuan due this year. The average return on those products was 6.88%, compared to the standard rate of 1.5% on one-year deposits paid by banks.

The trust has not disclosed much to the public about its situation, although it said it was aware of fake messages being shared on social media stating that the company could no longer operate. The company reported this to the authorities, according to a statement on its website.

In an unverified message circulated on social media, a wealth manager at Zhongzhi apologized to his clients, saying the group’s wealth arms had decided to delay payments on all products since mid-July. The letter said the accident involved more than 150,000 investors with outstanding investments totaling 230 billion yuan.

A prolonged slump in China’s real estate sector has left once-safe real estate developers to their knees. The sector is caught in a vicious cycle as failed developers turn homebuyers away from their purchases, which then hinders the companies’ cash flow. Home sales fell the most in a year in July.

Gary Ng, chief economist at Natixis, said the missed payments show “how the real estate liquidity problem can create a domino effect on other sectors, including the trust industry.” “It wouldn’t be surprising to see more trusts with a high asset allocation to real estate having payment problems.”

Read more: Fan fears the loss of a country garden in the Chinese real estate market

The National Financial Regulatory Administration, Zhongrong Trust and parent Zhongzhi Group did not respond to requests for comment.

Nacity Property Service and KBC Corp. announced. For the first time reported the news of Zhongrong International Trust’s payment delay in two statements on Friday evening. KBC, a carbon products manufacturer, said in a statement to the Shanghai Stock Exchange that the late payments are related to 60 million yuan invested with Zhongrong Trust.

Another listed company said on Friday that payments on a wealth product it bought from a Zhongzhi unit were overdue this month and it would take legal action to recoup the investment losses.

Zhongrong Trust, which managed 786 billion yuan in assets as of Dec. 31, said its business faced a “relatively high level” of credit risk in 2022 as counterparty liquidity pressures and refinancing difficulties eroded its ability to meet payments, according to its report. annual. Report for the year.

Real estate accounted for 11% of the Zhongrong Trust’s 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 real estate project that lacked relevant approvals, and has vowed to improve compliance.

Trust companies, including Zhongrong Trust and MinMetals Trust Co., Ltd. , took stakes in at least 10 real estate projects last year, and is betting that the unfinished homes will eventually generate cash to pay back some of the $230 billion in property-backed money they have issued to investors.

China’s benchmark CSI 300 index fell 0.7% on Monday, while Hong Kong’s Hang Seng China Enterprises index lost 1.6%. The yuan fell 0.2 percent against the dollar.

– With help from Qingqi She and Zheng Li.

(Adds the Regulatory Action Team from the second paragraph.)

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