Home

China's property crisis deepens: Zhongzhi shadow bank faces investigation

PUBLISHED

2023-11-27

Content

China's property woes continue to inflict damage on the nation's economy, with indications of substantial losses and potential criminal investigations surfacing as the government grapples with years of lax regulation, dubious transactions, and excessive lending throughout the financial sector.

While the media has primarily focused on the gradual unraveling of giants like China Evergrande, Country Garden, and Sino-Ocean, with their combined debts exceeding $600 billion USD, the financiers behind these firms have mostly remained hidden. Exceptions include last year's stories of a nationwide mortgage repayment strike and regulatory interventions in some regional financial institutions.

News regarding China Evergrande and a few of its rivals has sporadically emerged, but the weekend brought the first revelation of a financier linked to official investigations—Zhongzhi Enterprise Group. This company is described as a prominent "shadow bank" in China, providing financing for financial products and property-related deals.

Founded in Beijing in 1995, Zhongzhi Enterprise Group has been a significant player in China's financial landscape, operating as one of the country's largest private conglomerates, with interests in financial services, mining, and electric vehicles. Concerns about its financial stability were triggered in August when a trust it partly owns admitted to missing payments to corporate investors.

Last Wednesday, both domestic and international media reported that Zhongzhi Enterprise Group had informed its investors of its insolvency and inability to repay debts—officially $64 billion USD, with potentially billions more tied to its "shadow banking" activities.

In a letter issued on Wednesday, Zhongzhi apologized to investors, revealing total liabilities ranging from 420 billion to 460 billion yuan ($58 billion to $64 billion USD), compared to estimated assets of less than 200 billion yuan (less than $30 billion USD). This marked a deficit of at least $36 billion USD, which is expected to grow as asset values decline and more debt surfaces.

Zhongzhi Enterprise Group explained, "Since the group’s assets are concentrated in debt and equity investments and have a long duration, collection is difficult, the expected recoverable amount is low, liquidity is exhausted, and asset impairment is serious."

Reports from Reuters and others indicated that the firm has significant exposure to China's real estate sector and plays a pivotal role in China's $3 trillion shadow banking sector, approximately equivalent to the size of the French economy.

On Saturday, a social media post disclosed that Chinese security police are investigating suspected crimes committed by Zhongzhi. The Chaoyang Public Security Bureau, Beijing's primary Public Security group, issued the post, announcing its probe into "many" suspects associated with the company and urging investors to report their losses to aid the ongoing investigation.

The post did not specify the nature of the alleged crimes committed by Zhongzhi or its individuals.

This marks the fourth high-profile news event from the property sector in recent months. In September, the head of China Evergrande, burdened with over $300 billion USD in debt, was placed under police 'control,' with no subsequent updates on any investigations or charges. This followed Evergrande's disclosure in September that an offshore recapitalisation attempt and issuance of fresh debt had stalled due to an ongoing regulatory inquiry into one of its primary Chinese units.

Some Western analysts believe that as investigations progress and charges are filed, the government may extend targeted financial assistance to companies untouched by scandal.

Author