The Chinese trust sector has once again set off alarm bells with the announcement that Zhongzhi Enterprise Group is declaring itself “seriously insolvent.” The Beijing-based conglomerate has warned that it faces a deficit of 260 billion yuan, the equivalent of 33.4 billion euros, and has warned of the risk that this poses to the normal development of its operations. Zhongzhi is one of China’s largest shadow banks and invests much of investors’ money in real estate projects. The firm’s situation, which has not stopped worsening since the summer, has once again highlighted the liquidity problems present in the Asian giant’s financing market, valued at around 2.7 trillion euros.
Late on Wednesday, Zhongzhi acknowledged through an apology letter addressed to its investors that it has liabilities reaching up to 460 billion yuan (almost 60 billion euros), a figure that doubles its total assets, estimated at approximately 200 billion yuan. yuan (about 25.6 billion euros). At its peak, this wealth management firm controlled more than one trillion yuan in assets (€128.4 billion).
The company itself has explained that a preliminary review shows that the firm “does not have sufficient assets to cover short-term debt” and that “the group has faced a significant risk” of not being able to operate continuously and stably in the long term. In addition, it warns that the company’s liquidity has been exhausted and anticipates a low recovery from the sale of assets.
Zhongzhi attributes the huge deficit to “internal management [de la firma] spiraled out of control” following the departure of “multiple senior executives and key personnel” following the death in December 2021 of Xie Zhikun, the company’s founder, who “played a key role in the group’s decision-making.” Despite attempts to save the situation, “investment products have defaulted one after another,” which has led the company to “deeply apologize to investors,” the text summarizes.
Formal complaints
The first signs of Zhongzhi’s weakness emerged in August, when its investment subsidiary, Zhongrong International Trust, defaulted on a series of high-yield investment products. That default fueled concerns about possible contagion to the Chinese real estate sector, which represents approximately a quarter of the country’s economy. This Thursday, numerous retail investors in the company have filed formal complaints with the authorities in Beijing, according to the British newspaper. Financial Times.
“The fortunes of the financial sector are closely related to real estate, due to the high debt rate of large developers,” says Ding Haifeng, consultant at the Shanghai consultancy Integrity, quoted by the Hong Kong newspaper. South China Morning Post (SCMP). “A collapse of the real estate market will cause a wave of doubtful assets in banks, trust companies and insurance companies,” says this expert. From Everbright Securities International they agree that “private trust companies will continue to go through difficulties, with more possible bankruptcies,” but they rule out that “what happened in Zhongrong represents a systemic threat to the real estate sector or to the financial sectors in general,” they write in a note.
The Zhongzhi financial crisis adds to the instability already prevalent in the Chinese real estate market. The storm in the industry broke out in 2020, when the Government approved a series of restrictions to control the level of debt in the sector. But the defaults that have occurred since 2021 by key developers (such as Evergrande and Country Garden) have hampered the growth of the second largest economy on the planet and have shaken global markets.
According to its first half results report, Evergrande, the most indebted real estate group in the world, records a liability of 308 billion euros, of which 77.5 billion are for unfinished homes. For its part, as of June 30, Country Garden reported a debt with interest of 33.1 billion euros, in addition to 77.5 billion euros in homes pending delivery to buyers, according to its latest provisional report, which is included in the SCMP. In response, Chinese authorities have increased pressure on state banks in recent weeks to boost lending to real estate groups.
The shares of the developers rose on Thursday, after Bloomberg published an article in which it ensures that Beijing has created a provisional list of 50 real estate companies susceptible to receiving financial aid. Country Garden rose as much as 22.4%, although its shares are down more than 60% this year.
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