China’s major shadow bank, Zhongrong International Trust Co., has skipped payments on numerous investment products, leading to uncommon protests in Beijing as the effects of a worsening property market crisis extend to the financial sector.
The situation is escalating across China’s financial markets due to disappointing economic data, renewed property sector concerns, and an unfolding crisis in the shadow banking sphere. Investors are urging Beijing for more decisive measures as previous policies have failed to restore confidence.
This week, Chinese authorities reportedly asked certain investment funds to refrain from being net sellers of equities to counter the deepening market decline.
Investor attention is now focusing on Zhongrong. In a recent meeting with clients, Wang Qiang, the board secretary of the firm partly owned by Zhongzhi Enterprise Group Co., disclosed that Zhongrong had missed payments on several products since August 8, adding to the delays on at least ten others since late July. The number of overdue products has risen to at least 30, and Zhongrong has also halted redemptions on some short-term instruments due to sudden liquidity issues.
Wang acknowledged the absence of an immediate plan to cover the payments due to the unexpected drying up of short-term liquidity. He likened the situation to a “tsunami” of inquiries from investors and their wealth managers, urging patience while the firm seeks to recover its investments’ value.
The increasing delays indicate that the problems at Zhongzhi, which manages $138 billion, run deeper than previously thought. Chinese authorities have formed a task force to analyze potential contagion risks, with the banking regulator assessing the situation at Zhongzhi.
Zhongrong, a significant player in China’s $2.9 trillion trust industry, which channels savings from affluent households and corporations into loans and various investments, has 270 high-yield products worth 39.5 billion yuan ($5.4 billion) due this year.
The unfolding liquidity challenges underscore how the property sector’s issues and China’s weakening economy are permeating the financial industry. Numerous trust products are linked to real estate projects by troubled developers such as China Evergrande Group.
In a rare public display of anger, around two dozen individuals protested outside Zhongrong’s office, questioning why the company had not repaid them as expected.
The liquidity crunch stems from unexpected circumstances, making it difficult to meet short-term debt obligations, especially since most underlying assets are illiquid and long-term. Zhongrong is aiming to mitigate the fallout from defaults to stabilize its operations and enable repayment.
Zhongzhi, like other private wealth managers, has been under Beijing’s scrutiny to mitigate risks for retail clients who assume these products are safe.
China is grappling with a sluggish economy and the aftermath of a property market decline, which could result in defaults by major players. The central bank has already made substantial interest rate cuts to stimulate growth. Concurrently, new home prices have seen a two-month consecutive decline.
Bloomberg Economics notes that the trust sector has around 2.2 trillion yuan ($300 billion) in exposure to real estate, comprising 10% of total assets by the end of 2022. Zhongrong ranks as the ninth-largest trust, possessing approximately 600 billion yuan ($82 billion) in assets.
The risk lies in a negative feedback loop emerging, wherein property market stress strains the financial system, undermining credit expansion, and economic growth, and further intensifying the property sector’s slump.
