Chinese wealth manager Zhongzhi flags bankruptcy and $64 billion in liabilities

China’s Zhongzhi Enterprise Group, a prominent wealth manager, has disclosed to investors that it faces significant insolvency, carrying liabilities of up to $64 billion. This revelation raises concerns about the extension of China’s property debt crisis into the broader financial sector. Zhongzhi, heavily linked to China’s real estate sector, expressed regret to investors in a letter, citing total liabilities ranging from about 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion).

According to the letter, these liabilities surpass Zhongzhi’s estimated total assets of around 200 billion yuan. The company, a key player in China’s $3 trillion shadow banking sector, may amplify fears of contagion, although some analysts anticipate regulatory intervention to contain wider repercussions.

Since 2020, China’s highly indebted property sector has faced a liquidity crunch, leading to defaults by developers that hinder economic growth and impact global markets. Zhongzhi, operating in the shadow banking sector, typically operates with fewer regulatory constraints than commercial banks, directing funds from wealth products to real estate developers and other sectors.

Concerns about Zhongzhi initially surfaced in July when Zhongrong International Trust Co, controlled by Zhongzhi, missed payments on numerous investment products. The group acknowledges a significant financial gap, emphasizing the difficulty of liquidating concentrated long-term debt and equity investments. Zhongzhi expressed deep apologies for investor losses and recognized the urgency and seriousness of resolving the overall risk.

Facing high default risks, Zhongzhi’s underlying assets, primarily property-related, contribute to the challenges in recovering funds amid the property market downturn. Despite its diversified business interests spanning mining to wealth management, Zhongzhi is grappling with the repercussions of China’s shadow banking crackdown and the property market downturn.

Zhongzhi has initiated an audit by one of the Big Four accounting firms and is actively seeking strategic investors. However, concerns persist about the potential spillover effects of Zhongzhi’s challenges, prompting the anticipation of regulatory intervention to mitigate broader financial risks. Investors may face difficulties in obtaining full repayment, given the complexities of implicit guarantees in the financial system. 000000000