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China's property crisis: Zhongrong trust misses payments

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2023-08-17

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Concerns over the impact of China's property market turmoil intensify as Zhongrong International Trust, a major wealth manager in China, confirms a string of missed payments on financial products sold to investors across the nation.

These apprehensions prompted a 0.8% dip in the Shanghai market, a 0.7% decline in the CSI 300 index, and a 1.3% drop in the Hang Seng Index, marking another significant fall this week.

Zhongrong International Trust, formerly known as Harbin International Trust, established in 1987, is facing mounting reports of missed payments to investors of various types and sizes. The company has considerable exposure to the real estate sector.

Media sources indicate that a meeting held on Monday in Beijing with investors unveiled the confirmation of these missed payments, further fueling concerns.

The trust firm has been unable to reimburse clients over the past few days following reports that its second-largest shareholder, Zhongzhi Enterprise Group, depleted its cash reserves earlier this month, according to the Asia Times.

Bloomberg reported that Wang Qiang, the company's board secretary and legal adviser, disclosed during the meeting on Monday that Zhongrong International Trust is grappling with short-term liquidity challenges. Wang conveyed to investors that the firm currently has no immediate plans to fulfill repayment obligations for numerous matured products. The source declined to be named due to the sensitive nature of the issue.

Reuter's attempts to elicit responses from Zhongrong and the National Financial Regulatory Administration, the banking sector's regulatory body, went unanswered. Additionally, Wang, who serves as both board secretary and legal adviser, remained unreachable.

Bloomberg's report detailed Wang's announcement during the meeting that certain short-term investment products, spanning three to twelve months, utilised funds generated from the sale of new products to settle obligations tied to older products.

Investors expressed their displeasure by questioning the rationale behind the firm's utilisation of the "pooling of funds" model for product sales. This approach involves consolidating funds from different investment products into a single entity, then using proceeds from newly sold products to meet obligations from older ones. In 2018, China introduced comprehensive asset management regulations to curb such practices.

According to media accounts, Wang assured investors that the firm's trust products are registered with regulators and adhere to relevant regulations.

Wang also conveyed to investors the firm's commitment to restore normal operations and develop a plan to fulfill obligations, either through asset disposition or restructuring, as indicated in the reports.

Zhongrong's engagement with investors comes on the heels of two publicly listed companies announcing over the weekend that they hadn't received payment for maturing investment products from the trust firm, which has historically had substantial exposure to the real estate market.

The missed payments by Zhongrong have exacerbated concerns surrounding the outsized exposure of China's $3 trillion shadow banking sector. This issue surfaces at a time when the economy's vulnerability is accentuated by a deepening property downturn.

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