China’s hidden financial dangers erupt with shadow bank crisis

Bloomberg :
Only a week ago, Zhongzhi Enterprise Group Co attracted little notice within China and was almost unheard of everywhere else.

Now, the secretive shadow banking giant has become the latest symbol of financial fragility in an US$18 trillion (RM83.6 trillion) economy where confidence among investors, businesses and consumers is rapidly dwindling.

The privately owned manager of more than one trillion yuan (RM640 billion) and its trust-company affiliates are under intense scrutiny after halting payments to thousands of customers.

Underlining its importance, regulators have formed a task force as they seek to prevent contagion.

Behind the scenes the firm has hired KPMG to carry out what is likely to be a protracted restructuring process.

Potential asset sales threaten to weigh on broader markets.

Zhongzhi’s troubles have also sparked protests, prompting the police around the country to order disgruntled clients not to go public in their desperation to recoup losses.

Chinese assets have tumbled as word of Zhongzhi’s difficulties spread, helping pushing the yuan close to a 16-year low.

A central bank rate cut this week has done little to bolster confidence as concerns mount about more failures in the nation’s US$2.9 trillion trust sector.

The turmoil represents yet another challenge for Xi Jinping’s government, which is already grappling with a weak economy, a property selloff and growing geopolitical tensions with the US.

It’s also a reminder of the potential for unwelcome surprises in an opaque Chinese financial system that has long been dogged by concerns about unsustainable debt.

“This is a problem that’s only going to intensify” with more funds missing payments, Kathy Lien, managing director of BK Asset Management, said in an interview Thursday on BNN Bloomberg Television.

“There is only so much they can do,” she said, referring to Chinese authorities, calling this a “crisis of confidence”.

For Zhongzhi, the pieces unravelled quickly.

The first public sign of trouble came with three stock exchange filings by corporate clients in Shanghai late last Friday.

The filings sounded the alarm about missed payments on high-yield investment products offered by the firm and Zhongrong International Trust, a trust firm closely linked to Zhongzhi.

China unveils measures to revive stock market Zhongrong is a top-10 trust, pooling deposits from largely wealthy individual investors and companies to make investments in stocks, bonds and others assets, while lending to firms that can’t access traditional banks.

Though they operate in the shadows, the trusts account for almost 10% of total loans in China, according to Bloomberg Economics.

Zhongrong has 270 products totalling 39.5 billion yuan due this year, according to data provider Use Trust.

To lure cash, trusts like Zhongrong offer rates as high as 6% or 8% for a one-year term, about double what commercial banks pay on similar products.

With stocks in China tumbling and real estate in a two-year decline, these seemingly can’t-miss funds with quarterly payouts have attracted trillions of yuan.

The pitch worked for Joey, a client in northern China who invested about two million yuan – more than a quarter million dollars – into four Zhongrong products earning 4% to 6%.

Several neighbours invested as well.

She now wonders whether she will get any money back after payments stopped in June.

Visits to the local regulator and police have been fruitless.

“We are very desperate,” Joey said, declining to give her full name because of privacy concerns.

“We may have no choice but take to the streets sooner or later.”
Zhongzhi was founded as a lumber business in 1995 by Xie Zhikun, who before he passed away in 2021 made a fortune in printing before expanding into distressed assets including real estate.

Before Zhongzhi’s troubles emerged into the opening, it was already acting behind the scenes.

In late July it hired KPMG to review its balance sheet amid a worsening liquidity crunch, people familiar said earlier, asking not to be identified as the matter is private.