BEIJING, Nov 23 (Portal) – China’s Zhongzhi Enterprise Group, a leading asset manager, told investors it is highly insolvent with up to $64 billion in liabilities, renewing concerns that the country’s housing debt crisis could spill over into the broader financial sector.
The company, which has significant exposure to China’s real estate sector, apologized to its investors in a letter saying it had total liabilities of about 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion). billion US dollars).
The liabilities compare with Zhongzhi’s estimated total assets of about 200 billion yuan, said the letter issued on Wednesday and seen by Portal.
Beijing-based Zhongzhi did not immediately respond to a Portal request for comment.
Worsening problems at Zhongzhi, a key player in China’s $3 trillion shadow banking sector – roughly the size of France’s economy – will revive fears of contagion, although some analysts have expected regulators to intervene would in order to contain major consequences.
China’s heavily indebted real estate sector has been suffering from a liquidity crisis since 2020. Property developer defaults since late 2021 have hampered economic growth and rattled global markets.
Asset managers affiliated with shadow banks in China typically operate outside many of the rules that apply to commercial banks, funneling proceeds from asset products sold to retail investors primarily to real estate developers and other sectors.
“HUGE” HOLE
Signs of trouble at Zhongzhi Group first emerged in July when Zhongrong International Trust Co, a leading trust company controlled by Zhongzhi, suspended payments on dozens of investment products.
“The gap in the books is huge,” said Xu, who invests in a Zhongrong trust product and gave only her last name due to the sensitivity of the matter. “The company is in chaos.”
Zhongzhi, whose business interests range from mining to asset management, said in the letter that it would be difficult to liquidate the group’s assets and book earnings because it was focused on long-term debt and equity investments.
“Initial investigations show that the group is seriously insolvent and remains subject to significant operational risks. The resources available for short-term debt repayment are much less than the group’s total debt,” it said.
“Zhongzhi Group deeply apologizes for the losses caused to investors. We fully recognize the urgency, importance and seriousness of resolving this overall risk,” the group said in its letter.
HIGH RISK OF FAILURE
According to a video seen by Portal at the time, Zhongzhi had hired one of the Big Four accounting firms to conduct an audit of the company and was looking for strategic investors, management told investors at a meeting in August.
The assets underlying the Zhongrong trust are largely real estate-related and carry a high risk of default, said Xing Zhaopeng, senior China strategist at ANZ.
“The company cannot get the money back given the real estate problems. Therefore, there are large discounts on its assets.”
According to its website, Zhongzhi began trading timber and real estate in the 1990s and quickly expanded into companies in chip manufacturing, healthcare, new energy vehicles and finance.
The Company’s financial businesses include trust, asset management, insurance, futures and asset management.
Zhongzhi has in recent years sold shares in some listed companies it controls and reduced the size of its business after coming under pressure amid China’s crackdown on shadow banking and the housing market downturn.
“Financial regulators will almost certainly intervene aggressively if there are signs that Zhongzhi’s problems are expanding,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.
He added that the trust industry only accounts for about 5% of the entire financial system, so the problems there are not necessarily life-threatening.
Beddor said the chance for investors to fully repay their investments is minimal. “Officials could certainly provide relief to retail investors if they wanted, but they would essentially be turning their backs on years of attempts to undermine implicit guarantees. I suspect they won’t.”
($1 = 7.2111 Chinese Yuan Renminbi)
Reporting by Ziyi Tang and Ryan Woo; Edited by Sumeet Chatterjee and Muralikumar Anantharaman
Our standards: The Trust Principles.
Acquire license rights, opens new tab