BEIJING, Nov 23 (Reuters) – Zhongzhi Enterprise Group, China’s leading wealth manager, said it had up to $64 billion in loans to investors, threatening to rekindle concerns that the country’s asset-credit crisis is spilling over into the broader financial sector. .
The company, which has significant exposure to China’s real estate sector, apologized in a letter to its investors, saying it was worth about 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion).
According to the letter released on Wednesday and seen by Reuters, Zhongzhi’s estimated total assets are compared to liabilities of about 200 billion yuan.
Beijing-based Zhongzhi did not immediately respond to a Reuters request for comment.
Worsening woes at Zhongzhi, a key player in China’s $3 trillion shadow banking industry — roughly the size of the French economy — are rekindling concerns about contagion, although some analysts expect regulators to act to stem a wider fallout.
China’s highly leveraged property sector has been reeling from a liquidity crunch since 2020. Defaults by developers from late 2021 have hampered economic growth and rattled global markets.
Shadow banking-linked wealth managers in China operate outside many of the rules that typically govern commercial banks and mainly channel the proceeds of wealth products sold to retail investors to real estate developers and other sectors.
The ‘big’ hole
Signs of trouble at Zhongzhi Group first came to light in July when Zhongrong International Trust Co, a leading trust company controlled by Zhongzhi, failed to make payments on dozens of investment products.
“The hole in its books is huge. The company is in a mess,” said Xu, who is an investor in Zhongrong Foundation Manufacturing, who gave only his surname due to the sensitivity of the matter.
Zhongzhi, whose business interests range from mining to wealth management, said in the letter that the group’s assets are concentrated in long-term debt and equity investments, making it difficult to liquidate them and book income.
“Preliminary studies show that the group is seriously insolvent and has significant ongoing operational risks. Resources to repay debt in the short term are far less than the overall debt level of the group,” it said.
“Zhongzhi Group deeply apologizes for the losses to investors. We fully understand the urgency, importance and seriousness of addressing this cumulative risk,” the group said in the letter.
High default risks
Zhongzhi has hired one of the big four accounting firms to conduct an audit of the company and is looking for strategic investors, its management told investors at a meeting in August, according to a video seen by Reuters at the time.
Zhongrong Trust’s underlying assets are mostly property-related, which carry high default risks, said Xing Zhaopeng, senior China strategist at ANZ.
“The company can’t get cash back amid asset problems. So there are big discounts on its assets.”
Starting in the 1990s in timber and real estate trading, Zhongzhi quickly expanded into businesses ranging from chipmaking, healthcare, new energy vehicles and finance, according to its website.
Its financial businesses include trust, asset management, insurance, futures and wealth management.
Zhongzhi has been selling stakes in some of the listed companies it controls and reducing the size of its business over the past few years, under pressure after China’s crackdown on shadow banking and a slumping property market.
“If there is any sign that Zhongzhi’s problems are spreading, financial regulators are almost certain to intervene seriously,” said Christopher Bedore, deputy director of China research at Gavekal Dragonomics.
He added that the trust sector is only 5% of the total financial system, so problems there are not necessarily life-threatening.
Fedor said the chances of investors fully recouping their investments are slim. “Officials can certainly make retail investors whole if they want to, but they will turn their backs on years of efforts to undermine implicit guarantees. I doubt they will.”
($1 = 7.2111 Chinese Yuan Renminbi)
Reporting by Chii Tang and Ryan Wu; Editing by Sumeeth Chatterjee and Muralikumar Anantharaman
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