Chinese wealth manager Zhongzhi flags insolvency, $64 billion in liabilities

BEIJING, Nov 23 (Reuters) – China’s Zhongzhi Enterprise Group, a major wealth manager, told investors it is deeply insolvent and has up to $64 billion in liabilities, threatening to reignite concerns that the debt crisis real estate in the country is spreading to the financial sector in general. .

The company, which has considerable exposure to China’s real estate sector, apologized to its investors in a letter that said it had total liabilities of around 420 billion yuan ($58 billion) to 460 billion yuan ( 64 billion dollars).

The liabilities compare with Zhongzhi’s estimated total assets 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 – about the size of the French economy – will revive concerns about contagion, although some analysts had expected regulators to intervene to curb the spread. broader consequences.

China’s highly indebted real estate sector has been reeling from a liquidity crisis since 2020. Developer defaults since late 2021 have impeded economic growth and rattled global markets.

Wealth managers linked to shadow banking in China typically operate outside many of the rules governing commercial banks and primarily channel revenue from wealth products sold to retail investors to property developers and other sectors.

‘HUGE’ HOLE

Signs of trouble at the Zhongzhi group first came to light in July when Zhongrong International Trust Co, a major trust company controlled by Zhongzhi, failed to make payments on dozens of investment products.

“The hole in their books is huge,” said Xu, who is an investor in a Zhongrong trust product and gave only her last name because of the sensitivity of the matter. “The company has been in a mess.”

Zhongzhi, whose business interests range from mining to wealth management, said in the letter that as the group’s assets were concentrated in long-term debt and equity investments, it was difficult to liquidate them and account for returns.

“Initial inspections show that the group is seriously insolvent and has significant ongoing operational risks. The resources available for short-term debt repayment are much lower than the group’s overall debt scale,” 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 NON-COMPLIANCE

Zhongzhi had hired one of the Big Four accounting firms to conduct an audit of the company and was seeking strategic investors, its management told investors at a meeting in August, according to a video seen by Reuters at the time.

The Zhongrong trust’s underlying assets are largely property-related, which have high default risks, said Xing Zhaopeng, senior China strategist at ANZ.

“The company cannot recover the money due to real estate problems. Therefore, its assets are heavily discounted.”

Zhongzhi began trading in timber and real estate in the 1990s and quickly expanded into businesses ranging from chip manufacturing, healthcare, new energy vehicles and finance, according to its website.

Its financial businesses include trusts, asset management, insurance, futures and wealth management.

Zhongzhi has been selling stakes in some listed companies she controlled over the past few years and downsizing her business, after coming under pressure in the wake of China’s crackdown on shadow banking and a slowdown in the property market.

“Financial regulators will almost certainly intervene aggressively if there are any signs that Zhongzhi’s problems are spreading,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.

He added that the trust industry represents only about 5% of the total financial system, so problems there are not necessarily life-threatening.

Beddor said the chance of investors getting their investments fully refunded is slim. “Officials could certainly compensate retail investors if they wish, but they would essentially be turning their backs on years of attempts to undermine the implied guarantees. I suspect they won’t do it.”

(1 dollar = 7.2111 Chinese yuan renminbi)

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