HANGZHOU, CHINA – NOVEMBER 15, 2023 – An aerial photo shows a new property under construction in Hangzhou city, Zhejiang province, China, November 15, 2023.
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Zhongzhi Enterprise Group filed for bankruptcy protection late Friday as the Chinese shadow banking conglomerate finds itself unable to repay its debts amid the country's worsening real estate crisis.
The company filed for bankruptcy, saying it was “clear” According to a WeChat statement from the First Intermediate People's Court in Beijing, the country is unable to repay its debts and does not have sufficient assets to pay off its debts.
Shadow banks in China pool the savings of households and businesses to offer loans for investments in real estate, stocks, bonds and commodities. Companies like Zhongzhi have often financed many large Chinese real estate developers.
Zhongzhi had already warned about its strained financial situation in August, when Portal reported that the company had told investors it was facing a liquidity crisis.
It then declared bankruptcy in a letter to its investors in November, and shortly afterwards the Beijing police opened an investigation into the indebted shadow bank.
“Although the company's creditors are largely wealthy individuals rather than financial institutions, its collapse could still impact overall market confidence. It could also renew concerns about the trust industry and whether this would have a broader and significant impact on the struggling real estate industry,” analysts at Commerzbank wrote in a note to clients.
The broader CSI 300 index fell 1.2% in early afternoon trading, weighed down by real estate stocks.
Hong Kong-listed shares of real estate companies including Logan Group, China Vanke, Sunac and Longfor Group fell between 2% and 3.6%.
China's government has tried in recent years to limit the rapid growth of non-bank debt issued by shadow banks.
The largest banks in China are state-owned, making it harder for non-state-owned companies to attract traditional banks for financing, which has contributed to a rise in shadow banking.
The country's huge real estate sector is also caught in the middle of a crackdown on shadow banking that was used by real estate companies to buy properties from local governments.
“We do not expect a government bailout as many Zhongzhi products are non-standard asset management products that have long been rejected or banned by Chinese regulators; some are akin to a Ponzi scheme,” Zerlina Zeng, senior credit analyst at CreditSights, told CNBC Box Asia’s Squawk.
“We are likely to see more trust loan defaults because their underlying investments are local government financing instruments and real estate debt…Local governments are likely to continue to prioritize government debt at the expense of trust loans,” Zeng warned.
China's real estate market has been plagued by a debt crisis since 2020, with property giants such as Evergrande and Country Garden struggling to repay their debts. Their cash flows have dried up, largely due to declining home sales.
Home sales growth and prices remained sluggish, but Beijing initiated broader deleveraging in the once-bloated real estate sector, which directly and indirectly accounts for about a third of China's economic activity.
— Clemet Tan and Evelyn Cheng contributed to this story.