Zhongrong International Trust Co.’s office is located in Beijing. The company is managed by Zhongzhi Enterprise Group, and the missed payment in August 2023 may have been the first sign of trouble for financial institutions. Bloomberg via Getty Images
An apology from one of China’s biggest shadow banks is a worrying sign that the country’s long-running real estate crisis could now spill over into the financial system.
Zhongzhi Enterprise Group has reportedly warned investors that it may not be able to repay its debts, putting its total debt at around 420 billion to 460 billion yuan ($59 billion to $65 billion). . The Beijing-based financial institution has significant exposure to Chinese property developers, so its stumble has reignited concerns that problems in the country’s real estate sector could spill over.
The company said in a letter to investors on Wednesday that it has tangible assets worth about 200 billion yuan ($28 billion), according to Reuters. That could create a shortfall of up to $37 billion.
Nakashi did not immediately respond to a request for comment.
Zhongzhi Enterprise Group is a financial conglomerate in China’s shadow banking sector, operating outside the formal regulations governing traditional banks. These financial institutions tend to work with wealthy households and corporate clients by providing loans and investing in real estate, commodities, and bonds. Shadow banks offer higher returns than large state-backed banks, which traditionally have low interest rates.
Signs of the shadow bank’s problems first appeared in August when its affiliates defaulted on payments on several high-yield investments. In the letter, Zhongzhi reportedly blamed the death of founder Xie Zhikun in 2021 and the subsequent resignations of senior executives on internal management issues.
Priyanka Kishore, chief economist at research firm Asia Decode, said the possibility of Zhongzhi defaulting was not surprising given its troubles reported in August. Still, she says it’s important not to “get swept up in the hard-landing narrative.”
“As long as there are few such incidents, the risk of a systemic crisis remains low because the government acts as a backstop,” she explains. “The potential for more such defaults and bankruptcies may have influenced the Chinese government’s decision to provide stronger support to the real estate sector, including funding some developers. Highly sexual.”
China’s real estate sector accounts for about a third of its gross domestic product (GDP), and analysts have warned that real estate concerns are contributing to a crisis in consumer confidence. Meanwhile, the Chinese government has announced new measures to boost the real estate sector, including providing at least $140 billion in additional stimulus and allowing banks to provide unsecured short-term financing for developers’ daily operations. It is reported that measures are being considered.
According to Bloomberg, even in the midst of the real estate crisis, Zhongzhi, through its affiliates, provided loans to struggling developers and extracted assets from companies such as struggling real estate firm Evergrande. It is said that he bought it.
China’s real estate crisis began in late 2021 when China Evergrande Group, the world’s most indebted real estate developer, defaulted on its dollar debt. Subsequently, liquidity concerns spread across the sector, with other developers also defaulting.
Creditors on Tuesday seized Evergrande Chairman Hui Kar Yang’s two Hong Kong properties worth $192 million. The developer faces a liquidation hearing in Hong Kong on December 4th, which could put it at risk of liquidation.
Another major developer, Country Garden, also defaulted on its dollar debt for the first time in October. The company is one of the country’s largest development companies by revenue and was previously considered a model by officials.
According to official data, new home prices in 70 Chinese cities fell 0.4% month-on-month in October. This is the largest monthly decline in the past eight years.