On a messaging platform hosted by the Shanghai Stock Exchange where investors can put queries directly to companies, the focus this week has been on missed payments from a sprawling financial conglomerate.
“Dear investor,” wrote chemical business Shanghai Chemspec in one of a dozen similarly worded reassurances from listed groups, “the company has not bought any wealth management products from Zhongrong or Zhongzhi.”
Zhongrong, partly owned by investment group Zhongzhi, is one of the biggest players in a $2.9tn shadow financing market, referred to as the trust industry. Doubts over its health have added to mounting concerns about the state of China’s economy, which is struggling to recover after the Covid-19 pandemic.
Two listed companies said last week Zhongrong had failed to repay trust products, which offer savers and companies higher returns than traditional banks. This followed weeks of speculation over separate missed payments to retail investors from Zhongzhi’s wealth management businesses, which also direct billions of renminbi into savings products.
“When the crisis was only concentrated around Zhongzhi wealth management companies, the market was not so panicked,” said Karen Wu, an analyst at CreditSights. With Zhongrong, “the crisis has actually accelerated”.
Given that shadow financing often flows into the property sector in China, the Zhongzhi group’s woes have fuelled deeper fears of spillover effects from a slowdown in the country’s once-booming real estate industry, which has already driven dozens of developers into default.
China’s trust industry typically “organises capital from companies and individuals” at higher rates than banks can provide, according to one former senior employee of a bank in mainland China. He added that trust companies in general “probably are overly exposed to real estate”.
Xiaoxi Zhang, an analyst at Gavekal consultancy, pointed to data from the China Trustee Association which showed Rmb1.1tn ($152bn) of Rmb23tn in trust products were invested in the property sector. He wrote that the true figure was “probably far bigger” given trust funds were often routed through multiple intermediaries to developers. There is also no data on trust lending to local government financing vehicles.
In light of missed bond payments last week from Country Garden, China’s biggest privately owned homebuilder, analysts at JPMorgan warned of “a vicious cycle on real estate financing, intensifying liquidity stress for developers and their non-bank creditors”.
The analysts added that Zhongrong had total assets of Rmb629bn, of which Rmb67bn was invested in the property sector. “There is no disclosure on the profile of real estate debtors,” they wrote. “We assume that all real estate-related debt is at risk.”
Zhang at Gavekal suggested that while regulators had cracked down on shadow banking, including its ability to finance property and its links to the conventional banking system, the missed payments at Zhongzhi were a sign “that debt strains from property developers and local government financing vehicles are spreading across China’s economy”.
Beijing-based Zhongzhi was founded in 1995 by Xie Zhikun, a rags-to-riches entrepreneur who built his wealth in timber and real estate. By the time of Xie’s death in 2021, it had stakes in six financial institutions and four wealth management companies, as well as a range of other commercial interests from mining to new-energy vehicles. He was replaced by Liu Yang, his nephew and formerly chair of Zhongrong.
Zhongzhi’s four wealth management companies, which Chinese media outlet Caixin has estimated hold trillions of renminbi between them, have also been at the centre of Chinese social media chatter. A letter of apology for missed payments from a representative of an investment business linked to Zhongzhi has circulated widely on the internet.
Zhongzhi did not respond to a request for comment. Zhongrong, which this week said criminals had “forged its corporate seal, official letters and other documents”, did not respond to a request for comment.
In an informal meeting with investors at Zhongzhi’s headquarters last week, a Zhongrong board member made clear the scale of the problem, according to two people who attended.
Three of the four wealth management companies stopped making payments in June, the board member told them, adding that Zhongzhi’s investments included listed companies, real estate projects, debts and other property assets in third- and fourth-tier cities. The fourth wealth manager subsequently stopped making payments, two investors said.
There are signs of a retail investor backlash.
In early August, police were called to the headquarters of Zhongzhi while retail investors sought to “resolve” issues with management inside. Investors and police at the scene declined to comment on any details. Retail investors on Wednesday sought to lodge formal complaints with authorities in Beijing.
A Yunnan-based investor in Zhongrong products told the Financial Times he was owed about Rmb6mn. “These are all hard-earned assets . . . But now I have lost everything,” the investor said.
One person, who asked to remain anonymous, said his parents had invested in Datang, one of Zhongzhi’s four wealth managers. They work at a power plant on China’s east coast where “almost 100 per cent” of employees had similarly invested. Investors had been told in early July that payments would be delayed for 10 days, but they had not received payment, he said.
“It is really crazy because they thought it was absolutely safe,” the person said. “No one has communicated with anyone who actually works for Zhongzhi.”
A document sent to Datang investors and seen by the FT outlines a 12-month product called “Zhongzhi Shicheng” that provides an 8 per cent return if up to Rmb3mn is invested.
One page of the presentation is devoted to Ripple, the US cryptocurrency, and describes it as a “classic case” without clarifying how much of the proceeds, if any, are directed towards it.
Wealth management products in China often “do not do proper disclosure about underlying assets”, said Wu at CreditSights, so investors “don’t know what [they] are”.
For Zhang at Gavekal, debt troubles in the real estate sector will “inevitably surface in other places, including at commercial banks”, if the “market slump continues”.
“If that happens,” he added, “Zhongzhi may yet come to be seen as the canary in the coal mine.”
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