Wanxiang Trust: A Chinese shadow bank on the verge of financial turmoil

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The Hangzhou-based company has postponed payments on several billion yuan worth of maturing products, with some of the investments in real estate, according to the state-owned 21st Century Business Herald. This information was cited by unnamed investors on Tuesday. Trust companies typically manage funds for individuals, companies, or other entities.

China's trust firms are a part of the country's $3 trillion "shadow banking" industry, which serves as a significant source of finance. This term usually refers to financing activity that occurs outside the formal banking system, either by banks through off-balance-sheet activities or by non-bank financial institutions.

Last Friday, state-owned Cailianshe reported that Wanxiang had missed interest payments on two other trust products since August, which have a total outstanding value of 1 billion yuan ($141 million). Investors who had purchased the products, which were focused on the medical sector, protested at the financial regulator in the eastern province of Zhejiang last week, expressing their concerns to the supervisor and questioning Wanxiang's use of their funds, according to Cailianshe.

Wanxiangs hotline went unanswered and the company did not respond to emailed requests for comments.

Established in 2012, Wanxiang Trust is owned by Wanxiang Group, one of China's largest privately-owned conglomerates. As of the end of 2022, the trust company managed related assets worth 89.25 billion yuan ($12.6 billion), with 58% of that investment being in real estate.

The reports come two weeks after Zhongzhi Enterprise Group, another major shadow bank, declared itself "insolvent" after failing to make payments to its investors. Zhongzhi is currently at the center of a criminal investigation by police.

Zhongrong International Trust, pictured in Beijing in August, is partially owned by Zhongzhi Enterprise Group

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Last week, Fitch Ratings reported that the trust industry's issues are leading to a "property spillover" into the financial sector. Moodys Investors Services also cautioned in September that Chinas trust sector may encounter liquidity challenges amid the ongoing property downturn.

China's trust industry has provided significant lending to the country's property developers, a number of which have faced financial difficulties since 2020 following the government's measures to curb excessive borrowing. Wanxiang is one of the companies that has been affected, as one of its products became associated with the struggling property developer Kaisa Group, which defaulted in 2021, as reported by the 21st Century Business Herald.

A different product has been invested in a local government financing platform in the southwestern province of Guizhou, which has failed to repay some of its loans. The two medical trust products were connected to a hospital project in Guizhou, which is among China's most heavily indebted provinces, as reported by Cailianshe.

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Local governments, typically dependent on revenue from land sales, have been financially impacted by the property market downturn. Earlier this year, Guizhou sought help from Beijing to avoid default after failing to resolve its financial issues.

At the recent Central Financial Work Conference, the Chinese leadership emphasized the need to address financial risks more comprehensively and maintain stability across the sector.