China’s Zhongzhi Enterprise Group, a prominent wealth manager, has disclosed staggering insolvency, unveiling liabilities of up to $64 billion. This revelation has sparked concerns about the potential spillover of the country’s property debt crisis into the broader financial domain, potentially reigniting worries about financial stability.
A Letter to Investors
In a letter addressed to investors, the firm, heavily entwined with China’s real estate sector, expressed regret over its predicament, citing total liabilities ranging from approximately 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion). The disclosed liabilities far exceed the estimated total assets of around 200 billion yuan, as indicated in the letter obtained by Reuters.
Despite requests for comment from Reuters, the Beijing-based Zhongzhi Enterprise Group has not yet responded.
Challenges within Zhongzhi
The escalating woes within Zhongzhi, a key player in China’s colossal $3 trillion shadow banking sector, equivalent to the size of the French economy, have raised concerns about contagion. Analysts anticipate regulatory intervention to mitigate the risk of a broader fallout.
The mounting challenges within Zhongzhi echo the turbulence experienced in China’s heavily indebted property sector since 2020. Defaults by developers since late 2021 have hindered economic growth and roiled global markets.
Zhongzhi’s troubles surfaced earlier in July when Zhongrong International Trust Co, a significant trust company under Zhongzhi’s control, missed payments on numerous investment products, shedding light on the magnitude of financial irregularities.
According to a concerned investor identified only as Xu, “The hole in its books is enormous. The firm has been in a mess.”
Long-Term Debt and Equity Investments
Acknowledging its precarious financial position, Zhongzhi conceded difficulties in liquidating concentrated long-term debt and equity investments, essential for realizing returns. The group highlighted substantial ongoing operational risks, admitting that resources for immediate debt repayment significantly lag behind the overall debt scale.
Expressing remorse for investor losses, Zhongzhi emphasized its commitment to urgently address the crisis, indicating plans to engage a Big Four accounting firm for an audit and seeking strategic investors. However, the group faces challenges due to its assets being largely tied to high-risk property-related assets within Zhongrong Trust, further compounded by the property market’s downturn.
Zhongzhi’s expansive business history, spanning from timber and real estate to chipmaking, healthcare, and finance, underscores its diverse interests, including trust, asset management, insurance, futures, and wealth management.
As financial regulators monitor the situation, concerns linger about the potential impact on investors’ repayment prospects, signaling a pivotal moment in China’s financial landscape with impending regulatory intervention and a growing challenge to maintain implicit guarantees in the financial system.