China’s Zhongzhi Enterprise Group, one of China’s top asset managers, has informed investors that it is highly insolvent with liabilities of up to $64 billion, threatening to reignite concerns that the country’s real estate debt crisis is spreading across the industry. financial in general.
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 between about 420 billion yuan ($58 billion) and 460 billion yuan ($64 billion). billions of dollars).
The liabilities are comparable to Zhongzhi’s total assets, estimated at around 200 billion yuan, according to the letter issued on Wednesday and seen by Reuters.
Beijing-based Zhongzhi did not immediately respond to a Reuters request for comment.
Worsening problems at Zhongzhi, a major player in China’s $3 trillion shadow banking sector – roughly the size of the French economy – will likely reignite concerns about contagion, although some analysts expect regulators intervene to contain a decline in the wider spread.
China’s heavily indebted real estate sector has been suffering from a liquidity crisis since 2020. Developer defaults since late 2021 have hampered economic growth and rattled global markets.
Asset managers linked to China’s shadow banking market typically operate outside many of the rules governing commercial banks and primarily channel proceeds from equity products sold to retail investors into property developers and other sectors.
“HUGE” HOLE.
Signs of trouble at Zhongzhi Group first emerged in July, when Zhongrong International Trust, a major trust company controlled by Zhongzhi, defaulted on dozens of investment products.
“The hole in their books is huge,” said Xu, who invested in a Zhongrong trust product and who, due to the sensitivity of the matter, gave only his last name. “The company is a mess.”
Zhongzhi, whose business interests range from mining to asset management, said in the letter that because the group’s assets are concentrated in long-term debt and equity investments, it is difficult to liquidate them and record returns.
“Initial inspections show that the group is seriously insolvent and presents significant operational risks. The resources available for short-term debt repayment are much lower than the overall size of the group’s debt,” it said.
“Zhongzhi Group deeply apologizes for the losses caused to investors. We fully understand the urgency, importance and seriousness of resolving this overall risk,” the group said in the letter.
HIGH RISKS OF DEFAULT
Zhongzhi has hired one of the big four accounting firms to perform an audit of the company and is seeking strategic investors, management told investors at an August meeting, according to a video seen by Reuters at the time.
The Zhongrong fund’s assets are largely tied to the real estate sector, which has high default risks, said Xing Zhaopeng, senior China strategist at ANZ.
“The company can’t get its money back because of real estate problems. So there are huge discounts on its assets.”
Starting with lumber trading and real estate in the 1990s, Zhongzhi quickly expanded into businesses ranging from chip manufacturing, healthcare, new energy vehicles and finance, according to its website. Financial activities include trusts, wealth management, insurance, futures and wealth management.
“Financial regulators will almost certainly intervene aggressively if there is any sign that Zhongzhi’s problems are spreading,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.
He added that the trust fund sector only represents about 5% of the total financial system, so the problems do not necessarily pose a threat. Beddor said the chance of investors getting a full refund of their investments is slim.
Source: Terra
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