The Chinese shadow banking giant Zhongzhi Enterprise Group Co. has filed for bankruptcy.

In this case, there is an example of a success story that ended in total loss. The shadow banking giant has suffered to a certain extent from the circumstances of the external environment, the current configuration of which is not favorable for business. At its peak, Zhongzhi controlled assets totaling over $140 billion. Over time, success faced the realities of the external environment, that annulled the achievements of the past.

The Chinese real estate sector has been experiencing a crisis situation for several years. The negative state of affairs in this area has become a factor of a large-scale negative impact on the state of the mentioned Asia country’s economic system. The crisis in the real estate sector turned out to be more complicated than the initial expectations regarding this problem. Beijing did not foresee the protracted nature of the negative situation and the wide scale of its impact on the entire economy. The crisis in the real estate sector for Zhongzhi became the force that caused the shadow banking giant to move towards bankruptcy.

The lender stated the sad truth that it obviously had no opportunity to repay debts. The relevant information is contained in a statement released by Beijing’s First Intermediate People’s Court on Friday, January 5.

During the audit, it was found that the debts of the shadow banking giant, which has lost its power, range from 420 billion to 460 billion yuan ($64.4 billion). At the same time, the total amount of the lender’s assets was fixed at 200 billion yuan. The relevant information was contained in a letter sent to the bank’s investors in November.

The collapse of Zhongzhi is one of the largest bankruptcies in Chinese history. Against this background, the mood of Chinese consumers and investors is likely to worsen, which last year did not differ in an optimistic perception of the then state of affairs and prospects for the future.

In the second half of 2023, the first concerns about Zhongzhi appeared in the financial markets. The alarming mood was caused by the fact that one of the bank’s subsidiary trust companies was unable to repay customers’ debts on high-yield bonds. Against this background, protests against Zhongzhi even began in Beijing.

In China, lenders are not only financial institutions but also wealthy people. This feature has its consequences. In this case, it is implied that the collapse of banks has a limited impact on the state of affairs in the financial system. But at the same time, bankruptcies actualize and, to a certain extent, still exacerbate problems in the $2.9 trillion trust sector. The unfavorable state of affairs is also intensifying against the background of insufficient growth rates in the Chinese economy and a rapid decline in the value of real estate.

In recent years, Zhongzhi and its affiliates, especially Zhongrong International Trust Co., have provided financing to developers in difficulty. The shadow banking giant also bought assets from companies, including China Evergrande Group. Zhongzhi’s operations were stable and unhindered at a time when competing trusts were reducing risks.

Zhao Jian, head of the Atlantis Institute for Financial Research in Beijing, said the ongoing downturn in the real estate sector, combined with tough policies and increased anti-corruption measures, had become a barrier to asset recovery. According to the expert, against the background of these realities, asset redeeming has become an extremely difficult task.

In November, Chinese authorities announced the launch of a criminal investigation into Zhongzhi’s money management business. A few days before the start of this process, the lender announced a shortfall of $36.4 billion on its balance sheet.

Currently, something like a generally accepted practice has developed in China, in which large debt bankruptcies go through debt restructuring. This algorithm of actions avoids high-profile statements about the collapse.

HNA Group Co., a conglomerate with debts worth several billion dollars, completed its restructuring work in 2022. China Evergrande Group, whose default in 2021 intensified the debt crisis in the real estate sector, is still trying to avoid liquidation and refrain from filing for bankruptcy for the time being. The company’s liabilities amount to about $327 billion.
Shadow banks such as Zhongzhi are in the regulatory space of the Chinese authorities on the smallest possible scale. Such organizations pool household savings to invest in stocks, real estate, commodities, and bonds. In China, the trust industry is the main alternative source of financing for borrowers who do not have access to traditional bank loans.

The media, citing insiders, reported that back in August, the authorities of the mentioned Asian country asked two major financial companies to examine the books of Zhongrong International. Also at that time, the bank’s management informed investors of its intention to restructure the debt, describing this plan as a way of self-salvation.

Alicia Garcia-Herrero, Natixis chief Asia-Pacific economist, said that the influence of Chinese trust funds on the real estate sector has significantly decreased after pressure from the authorities.

The results of the Natixis study indicate that the share of the mentioned Asian country’s trust companies in property in the second quarter of last year was 6.7%. In 2019, this figure was fixed at 15%. At the same time, this organization notes that some small trust firms continue to be very dependent on investments in the real estate sector.

Shen Meng, director of the Beijing-based investment organization Chanson & Company, says that Chinese authorities usually take action before the start of an official trial. This solution ensures that the risks are under control. As part of such measures, the authorities conduct a thorough check of balance sheets. According to Shen Meng, in the case of Zhongzhi, this algorithm of actions was applied because the bank has a significant impact on the state of China’s financial system.

Last year, the 100 largest developers in the mentioned Asian country reported annual sales of 5.4 trillion yuan, which is 16.5% lower than the result for 2022. The relevant data was released by China Real Estate Information Corporation.

As we have reported earlier, China Injects $50 Billion Into Some Banks.