China's Authorities Initiate Investigation into Distressed Financial Conglomerate Zhongzhi

One of China's largest privately-owned financial conglomerates, Zhongzhi, is facing further troubles as it becomes the subject of a criminal investigation. The Beijing police have initiated an inquiry into the wealth management unit of Zhongzhi Enterprise Group, following the company's recent disclosure to investors that it is "severely insolvent."

The police have stated that Zhongzhi is a suspect in illegal activities and has taken legal action against several suspects, including someone named Xie. The founder of the group, Xie Zhikun, passed away in December 2021, but his nephews still hold important positions within the group, as reported by Chinese state media.

Investors are being asked to actively assist the police in their investigation and evidence collection, although no further details about the specific crimes or actions have been provided.

Under Chinas Criminal Procedural Law, "criminal mandatory measures" can mean anything from bail pending trial or house arrest to detention or arrest.

The office building of Zhongrong International Trust, a trust company partially owned by Zhongzhi Enterprise Group, in Beijing, China August 22, 2023.

Florence Lo/Reuters

Zhongzhi manages almost twelve asset and wealth management companies. In a letter to investors on Wednesday, the company admitted to having a "large amount of debt" and being unable to cover all its expenses. It stated that its total liabilities could reach as high as 460 billion yuan ($65 billion), while its assets amount to 200 billion yuan. Chinese state-owned news outlets reported that Zhongzhi's letter also mentioned that it has run out of cash and is facing serious impairment of its assets. The company's preliminary assessment indicates that it is significantly insolvent and is at risk of ongoing operational challenges.

Zhongzhi expressed regret for its financial difficulties, attributing them to the passing of its founder in 2021 and the subsequent departures of senior executives, resulting in challenges with internal management. The group did not provide a response to a request for comment on Monday.

The Beijing-based company is a significant player in China's $3 trillion "shadow banking" industry, which serves as a crucial source of finance in the country. This term typically denotes financial activity conducted outside the formal banking system, including off-balance-sheet activities by banks and operations by non-bank financial institutions like trust firms. In August, concerns about Zhongzhi finances arose after a trust it partly owns failed to make payments to its individual and corporate investors.

Videos posted on Chinese social media and seen by CNN captured furious protesters chanting slogans and demanding payments related to investment products issued by the company. At least three listed companies were impacted, with the total amount of missed payments surpassing 110 million yuan ($15 million). This highlights the potential ripple effect of China's extended property downturn on its financial sector.

The company's financial difficulties are largely attributed to its significant ties to China's real estate industry. Zhongrong International Trust, which oversees $87 billion in funds for corporate and affluent clients, has allocated approximately 10% of its assets to real estate, as reported in its annual report from the previous year. However, a number of companies within its real estate portfolio have faced financial challenges since 2020 due to regulatory crackdowns on risky borrowing by developers.