Chinese shadow bank Zhongzhi has filed for bankruptcy, according to a statement Friday from Beijing’s First Intermediate People’s Court, which accepted its application for liquidation.
Zhongzhi said it “obviously” lacked the ability to repay its debts, according to the statement, seen by Bloomberg.
Zhongzhi in November declared a shortfall of as much as $36.4 billion and told investors, in an open letter, that it was “severely insolvent,” adding that management had “run wild” after the 2021 death of the firm’s founder, Xie Zhikun.
An audit calculated Zhongzhi’s debts, as of November, at between 420 billion yuan and 460 billion yuan ($64.4 billion), against assets of 200 billion yuan ($28 billion). The firm had overseen more than $140 billion at its peak, Bloomberg reported.
Zhongrong International Trust, a subsidiary of Zhongzhi, counted roughly $108 billion in assets under management at the end of 2022, according to The Wall Street Journal. However, a number of Chinese companies said in filings that they hadn’t received expected interest or principal payments on products managed by Zhongrong.
Days after Zhongzhi’s open letter, the lender’s wealth management arm came under a police investigation over unidentified crimes, the Financial Times reported.
Zhongzhi’s collapse exposes potential flaws in China’s $2.9 trillion trust sector, a loosely regulated gray area of the financial system that offers investment products to wealthy individuals and businesses. The sector is a crucial source of alternative for its borrowers, which include real estate developers and local governments.
The Chinese government, in recent years, has ramped up pressure to reduce trust funds’ exposure to real estate. Chinese trust companies’ exposure to property in the second quarter of 2023 sank to 6.7%, from 15% in 2019, the Financial Times reported, citing research from Natixis.
Zhongrong’s trust funds held 11% of their assets in the property sector in 2022, according to the company’s annual report, seen by The Wall Street Journal.
“The persistent decline in the real estate market, coupled with stringent policies and increased financial anti-corruption measures, has hindered timely asset collection,” Zhao Jian, head of the Atlantis Financial Research Institute in Beijing, told Bloomberg. “Redeeming these assets has become exceedingly challenging.”
A Hong Kong-based fund manager with a Chinese financial group told the Financial Times it was “quite surprising” that Zhongzhi had gone “straight into liquidation” because other Chinese companies with missed payments often have chosen to delay the start of restructuring.
Zhongzhi did not immediately respond to the publication’s request for comment.
Zhaopeng Xing, a senior China strategist at ANZ, told The Wall Street Journal the risk of contagion from Zhongzhi has passed, adding that accountants have spent months going through the company’s books and quantifying its risks.
But Xiaoxi Zhang, an analyst at Gavekal Dragonomics, said knock-on impact is still a possibility.
“Domestic investor sentiment may turn even worse, especially for wealthy investors,” she told The Wall Street Journal. “And of course, other shadow bank institutions are likely to follow suit.”
