One of China’s largest private wealth managers, Zhongzhi Enterprise Group Co., has triggered fresh anxiety about the health of the country’s shadow banking industry after missing payments on multiple high-yield investment products. The firm, which manages about 1 trillion yuan ($138 billion) in assets, operates at the heart of China’s once high-flying shadow banking market, which regulators have sought to corral since 2017.
The turmoil at Zhongzhi Group, often dubbed China’s Blackstone by local media, surged to the fore after several of its corporate clients disclosed overdue payments by a trust unit. Zhongrong International Trust, part owned by Zhongzhi Group, is among the biggest firms in the country’s $2.9 trillion trust industry, which pools savings from wealthy households and corporate clients to invest in and make loans to real estate, stocks, bonds and commodities.
The firm, which has missed at least two payments, has 270 products totaling 39.5 billion yuan due this year, according to data provider Use Trust. Many of those projects were left in trouble amid the property market slump and following the death of Zhongzhi Group’s founder Xie Zhikun in 2020.
Chinese authorities set up task force to examine risks
Investors are not the only ones spooked by the implications of Zhongzhi Group’s possible demise. Chinese authorities have already set up a task force to study any possible contagion, with the banking regulator examining risks at Zhongzhi Group, according to people familiar with the matter.
Zhongzhi Group is one of the last free-wheeling private wealth managers that Beijing has been trying to rein in to minimize risks for the hundreds of thousands of retail clients who bought these high-yield products assuming they were safe. The timing couldn’t be worse for Xi Jinping’s government, as China is already struggling with a weak economy and fallout from the moribund property market that’s threatening to push giants like Country Garden Holdings Co. into default.
China’s shadow banking sector has been under pressure for years after regulators began clamping down on the nation’s financial excesses in 2017. But Zhongzhi Group’s difficulties have emerged at a particularly sensitive time for investors, many of whom are already worried about the state of the world’s second-largest economy and its property market.
China’s economic outlook dims amid multiple challenges
The confluence of risks is adding pressure on Xi Jinping’s government to shore up investor confidence. Chinese stocks slumped on Monday, with the CSI 300 Index falling for the fifth time in six sessions, and the yuan depreciated toward its weakest level this year.
While markets took some solace from news of the Zhongzhi Group task force, analysts at JPMorgan Chase & Co. warned that the turmoil may contribute to a “vicious cycle” for real estate financing in China.
“The biggest problem now is how to isolate the risks associated with Zhongzhi Group so that it doesn’t cause confidence of the entire trust industry to collapse,” said Shen Meng, a director with Beijing-based Chanson & Co. “If the situation continues to worsen, expect the scale of the risks to be no less than when a leading property developer defaults.”
China’s economic outlook has dimmed amid multiple challenges, including a crackdown on private enterprise, stringent Covid restrictions, slowing consumer spending, rising debt levels and geopolitical tensions. The International Monetary Fund recently cut its growth forecast for China to 8% this year from 8.4%, citing a weaker-than-expected recovery in consumption and services.
