Chinese Financial Giant Zhongzhi Under Criminal Investigation

Chinese Financial Giant Zhongzhi Under Criminal Investigation | Enterprise Wired

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source-CNN

Beijing Police Launch Probe Into Zhongzhi’s Wealth Management

The challenges facing one of the largest privately-owned Chinese financial conglomerates, Zhongzhi, have escalated significantly as it finds itself at the heart of a criminal investigation. Beijing authorities have initiated a probe into Zhongzhi Enterprise Group’s wealth management division, a development disclosed over the weekend. This announcement follows closely on the heels of the company’s revelation to investors about its dire financial state, citing severe insolvency.

Police Investigation Unveiled

According to a statement released on Saturday, law enforcement suspects Zhongzhi of engaging in “illegal crimes” and have taken “mandatory criminal measures” against multiple suspects, including an individual named Xie. Despite the passing of the group’s founder, Xie Zhikun, in December 2021, his nephews continue to hold significant positions within the conglomerate, as reported by Chinese state media.

The police have urged investors to actively assist in the investigation without providing specific details regarding the alleged crimes or the measures enforced. Under China’s Criminal Procedural Law, “criminal mandatory measures” encompass a spectrum from bail pending trial or house arrest to detention or arrest.

Chinese Financial Opens Probes Into Embattled Shadow Banking Giant Zhongzhi

Chinese Financial Distress and Liabilities

Zhongzhi exercises control over nearly a dozen asset and wealth management entities. In a letter addressed to investors last Wednesday, the company conceded an overwhelming debt burden, stating an inability to meet its financial obligations. The conglomerate disclosed liabilities soaring up to 460 billion yuan ($65 billion), significantly outweighing its assets valued at 200 billion yuan.

“Liquidity depletion and severe asset impairment” were highlighted in the letter, underscoring the group’s acute insolvency and substantial ongoing operational risks. Zhongzhi attributed the Chinese financial plight to ineffective internal management following the founder’s demise and subsequent senior executive resignations in 2021.

Shadow Banking Industry Concerns

Operating within China’s $3 trillion “shadow banking” sector, Zhongzhi represents a crucial financing source outside the formal banking system. This sector involves financing activities conducted by banks through off-balance-sheet operations or non-bank financial institutions like trust firms.

Real Estate Links and Financial Strain

A significant factor contributing to Zhongzhi’s financial turmoil is its deep integration with China’s real estate sector. With Zhongrong International Trust, a partially owned entity, failing to meet financial obligations to investors, concerns about Zhongzhi’s financial stability began surfacing in August. This lack of payments affected both individual and corporate investors, leading to public demonstrations and demands for owed payments.

The conglomerate’s extensive investments in real estate, constituting about a tenth of its portfolio, have been impacted by the sector’s struggles since 2020. Stringent regulatory measures against excessive borrowing by developers have led to cash shortages among several companies within Zhongzhi’s real estate holdings.

The evolving situation surrounding Zhongzhi underscores broader concerns about the interconnectedness of China’s financial markets and the potential ramifications of economic shifts within key sectors like real estate. As investigations unfold, stakeholders brace themselves for further revelations about the conglomerate’s financial standing and the potential fallout within China’s financial landscape.

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