The Chinese shadow bank Zhongzhi is in deep financial trouble. Over the weekend, Chinese financial authorities began investigating the conglomerate’s asset management division. Concerns about another crisis are now spreading on the market, as was recently seen in the Chinese real estate market.
• Zhongzhi apologizes for financial misery
• Customers face total loss
• Protests against asset managers
Zhongzhi cannot pay debts
Things are currently anything but good for the Chinese financial group Zhongzhi Enterprise. After the associated trust fund provider Zhongrong was unable to make several payments for investment products that wealthy customers and companies had commissioned in August, the financial giant, which was founded in the 1990s as a timber and real estate dealer, has now stumbled further. According to reports in the Frankfurter Allgemeine (FAZ), Zhongzhi published an apology letter last week citing liabilities of 420 billion to 460 billion yuan, equivalent to $58 billion to $64 billion. According to the letter, the company’s assets currently amount to less than half of its receivables. Accordingly, Zhongzhi is “seriously insolvent,” as the letter stated.
Investors are probably largely left empty-handed
For the financial house’s customers, who according to the FAZ are primarily well-heeled Chinese, many of whom are older, the likely insolvency of Zhongzhi is likely to result in significant losses. The company attracted investors with higher interest rates, but payments are now likely to continue to be non-existent. According to information from the Bloomberg news agency, the damage to the investment firm’s clients is estimated at $56 billion. Ying Yue of the Leaqual law firm in Shanghai believes a scenario is likely in which more than 75 percent of the damages are lost and only 100 billion yuan, or 14 billion US dollars, are repaid. Similar to similar cases in the past, Zhongzhi’s case is likely to face a lengthy legal process, Ying said.
Investigations started
According to Bloomberg, investigations were launched against the asset manager over the weekend. Several people responsible for the Zhongzhi Group now face criminal consequences, including a person named Xie. Zhongzhi founder Xie Zhikun died two years ago, as the FAZ reported, but his relatives are still working in company management. Now there is a suspicion that the investigations could also affect the descendants of the company construct.
So far, pictures have also emerged showing customers holding signs protesting for the money they have invested to be returned. “Zhongzhi, give us our money back,” it read, according to the FAZ. Investors who trusted the asset manager are angry. According to the daily newspaper, some administrators of the troubled group had already been threatened by customers, and one of the managers did not want to take the blame for the total loss and even took his own life. The Chinese authorities have called on investors to actively participate in the investigation and to submit information and complaints.
Next crisis after real estate?
According to the “Handelsblatt”, the Zhongzhi company construct is considered one of the main players in China’s shadow banking sector. The financial houses active in this area often raise funds from private investors and then grant loans to companies or invest in various asset classes such as stocks, bonds, real estate and raw materials. This procedure is simplified by the fact that rules for commercial banks do not apply to shadow banks, according to the business paper.
With the collapse of the Zhongzhi empire, fears of a crisis among Chinese financial companies are now increasing, as “Spiegel” reported. In recent months, the plight of the real estate market in the People’s Republic, which was triggered by payment defaults by industry giants such as Evergrande and Country Garden, has already been unsettling. The fact that Zhongzhi, an important player in the shadow financial market, is now threatening to implode is now likely to shock the financial industry.
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