Chinese shadow banking firm Zhongzhi goes bankrupt

Beijing-based wealth management company, Zhongzhi Enterprise Group, has filed for bankruptcy liquidation due to inability to repay debt amidst a challenging property market downturn. The firm cited insufficiency of assets to cover its debts as the reason for the bankruptcy application, according to a statement from a Beijing court on Friday.

The court accepted Zhongzhi's bankruptcy liquidation application in compliance with China's enterprise bankruptcy law. The escalating troubles at Zhongzhi, a significant participant in China's $3 trillion shadow banking sector, which is approximately the size of the French economy, contribute to concerns that the country's property debt crisis is spreading to the wider financial sector.

The company, with significant involvement in China's real estate sector, issued an apology to its investors in a letter in November, admitting to being heavily insolvent with up to $64 billion in liabilities. Following this, police in Beijing, where the company is located, initiated an investigation into suspected criminal activity by Zhongzhi and stated that they were looking into "many" suspects associated with the company.

Zhongzhi did not respond to a request for comment from Reuters right away.

Since 2020, China's heavily indebted property sector has been struggling with a lack of funds. The defaults by developers since late 2021 have hindered economic growth and caused turbulence in global markets.

Signage atop the Zhongrong International Trust Co. offices in Beijing, China, on Monday, August 21, 2023.

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Wealth managers in China associated with shadow banking often operate without the same regulations as traditional banks. They primarily invest the funds from wealth products sold to individual investors into real estate and other industries.

In July, Zhongrong International Trust Co, a prominent trust company controlled by Zhongzhi, failed to make payments on numerous investment products, signaling issues within the company.

In August, Zhongzhi informed investors of a liquidity crisis and announced plans for debt restructuring, with management claiming it as a "self-rescue" effort focused on debt collection and asset liquidation, but not ruling out bankruptcy. According to lawyer Ying Yue from Leaqual Law Firm, the recent developments will facilitate quicker asset liquidation for the group.

The court process is expected to be drawn out, and investors are anticipated to experience significant reductions in the repayment plan, possibly recovering only 30% of their money, according to Ying, citing previous cases.