Chinese shadow lender Zhongzhi goes into liquidation

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A Beijing court has accepted a bankruptcy and liquidation application from investment group Zhongzhi, as the Chinese authorities push for a quick resolution to the problems of the insolvent conglomerate at the centre of the country’s $3tn shadow banking market.

The court said on Friday that Zhongzhi’s filing was due to the group lacking the capability to clear its debts, according to a statement from Beijing’s First Intermediate People’s Court.

In November, Zhongzhi’s wealth management arm came under a police investigation over unidentified crimes, days after the group declared a shortfall of as much as $36.4bn. In an open letter to investors, Zhongzhi admitted that it was “severely insolvent” and management had “run wild” after the 2021 death of founder Xie Zhikun. It said total assets amounted to just Rmb200bn ($28bn) against obligations of up to Rmb460bn.

Zhongzhi’s failure will prompt fears that a crisis in the property market and a wider economic slowdown in China are now feeding through into the country’s vast and highly opaque savings industry, affecting both the financial sector and individual investors.

Over decades, Zhongzhi had constructed a complicated web of investments in listed companies and developers as a shadow lender. Its high-risk lending policies and substantial exposure to the slumping property market plunged it into a liquidity crisis last year as it missed payments to retail investors in its wealth management businesses.

One Hong Kong-based fund manager with a Chinese financial group said it was “quite surprising” that Zhongzhi had gone “straight into liquidation” given that other Chinese companies with missed payments in recent years had typically sought to delay the start of restructuring.

Zhongzhi did not immediately respond to a request for comment.

Alicia García-Herrero, chief Asia-Pacific economist at Natixis, noted that the exposure of Chinese trust funds to the real estate sector has been significantly reduced, following acute pressure from Beijing.

Research from Natixis showed that Chinese trust companies’ exposure to property in the second quarter of last year sat at 6.7 per cent, from 15 per cent in 2019. But some smaller trusts, Natixis warned, remained “very dependent” on real estate investments.

García-Herrero also cautioned that the trusts’ exposure to the property sector, along with other parts of the shadow finance industry, had likely been transferred to bigger banks.