Chinese shadow bank Zhongzhi faces $36bn shortfall after ‘management ran wild’

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Zhongzhi, one of the biggest groups in China’s vast shadow financing market, faces a shortfall of as much as $36.4bn and has warned that it is “severely insolvent” in a letter to investors.

The worsening situation at Zhongzhi has put the spotlight on liquidity issues in China’s nearly $3tn shadow financing market and its exposure to the country’s property sector crisis.

Zhongzhi, a sprawling financial conglomerate, wrote in a letter viewed by the Financial Times that its total assets amounted to just Rmb200bn ($28bn) against obligations of up to Rmb460bn.

The company blamed the shortfall on the departure of “multiple senior executives and key personnel” and the 2021 death of founder Xie Zhikun, who “played a pivotal role in decision-making” at the group.

The company said “internal management ran wild” as a result of these departures. “The group’s investment products have defaulted one after the other, and we deeply apologise to investors,” it said.

Zhongzhi and its affiliate investment company Zhongrong missed payments on several products in August, prompting concerns of a brewing liquidity crisis.

“On a standalone basis, it is quite large,” said Zerlina Zeng, a senior credit analyst at CreditSights, “but compared to the China trust industry as a whole, it’s not very big.”

She added that authorities were unlikely to bail out the company. “Most of the hit will be taken by wealthy individual investors, so we don’t see the state stepping in this time around.”

Shadow financing in China frequently flows into property groups. Missed payments at Zhongzhi have prompted concerns of potential spillover effects from China’s slowing property sector, which has dragged down growth in the world’s second-largest economy.

A Beijing-based distressed-asset manager said he had declined a request last month to purchase Zhongzhi assets because they were worth “far less than the company claimed” and came with additional debt obligations.

Chinese authorities have recently increased pressure on state banks to boost lending to property groups such as Country Garden, once China’s largest private developer by sales but which recently missed offshore repayment obligations.

Shares in developers rose on Thursday following a Bloomberg report that Beijing had created a draft list of 50 real estate companies eligible for financing support. Country Garden rose as much as 22.4 per cent, though the stock is down more than 60 per cent this year.

The missed payments at Zhongzhi have spurred outrage among the company’s many retail investors, who have sought to lodge formal complaints with authorities in Beijing.

Zhongzhi did not immediately respond to a request for comment.

Additional reporting by William Langley and Chan Ho-him in Hong Kong