China’s property debt crisis shows no signs of receding and has even spread into the country’s shadow banking. This week, Zhongzhi Enterprise Group, a privately owned manager of more than 1 trillion yuan ($137 billion), and its trust company affiliates are under scrutiny after halting payments to thousands of customers on high-yield investment products offered by the company.
Zhongrong Investment Trust, a trust firm closely linked to Zhongzhi, is a top-10 trust company that pools deposits from investors and companies to invest in stocks, bonds, and other assets while lending to companies that can’t access traditional banks. According to Bloomberg Economics, the trusts account for almost 10% of total loans in China. According to data provider Use Trust, Zhongrong has 270 investment products totaling 39.5 billion yuan due this year.
Many state-owned property developers are warning of widespread losses. According to Bloomberg data on corporate filings, eighteen out of 38 state-owned enterprise builders listed in Hong Kong and mainland China reported preliminary losses in the six months ended June 30, up from 11 that warned of full-year losses in 2022. The losses could hamper efforts to take on unfinished projects left by defaulted private-sector companies, further curbing homebuyer sentiment.
Chinese regulators have formed a task force this week in an attempt to prevent contagion, and Zhongzhi Enterprise Group hired KPMG LLC to restructure its debt, which could potentially include asset sales that would further weigh on broader markets. BK Asset Management said, “This is a problem that’s only going to intensify” as this is a “crisis of confidence,” and there is only so much Chinese authorities can do.
It is unknown how many products Zhongzhi has defaulted on and whether the company has sufficient assets to cover the shortfall if liquidated. In recent years, Zhongzhi and its affiliates, especially Zhongrong, extended financing to troubled Chinese developers and bought up assets from companies, including debt-ridden China Evergrande Group. China’s property woes created a cash crunch for trusts like Zhongrong, which count on investments and loans to pay depositors. According to Bloomberg Economics, about 10% of all trust assets, some $300 billion, are tied to the property sector. Also, Use Trust said about 106 trust products worth 44 billion yuan defaulted this year through July 31, with real estate investments accounting for 74% of all the defaults by value.
Chinese authorities have stepped up efforts to try to contain the debt crisis. This week, the People’s Bank of China (PBOC) unexpectedly cut interest rates. Also, mainland Chinese exchanges asked some investor funds to avoid net selling equities, and China’s securities regulator today said it would cut handling fees in stock transactions. However, these actions have yet to soothe investor concerns. Fitch CreditSights said, “The defaults could continue to hurt investor and market sentiment, and disorderly winding-up of any large trust or wealth management company could test near-term financial stability.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
