China’s troubled $137 billion shadow bank plans debt restructuring, taps KPMG
The Chinese shadow banking giant, Zhongzhi Enterprise Group Co., which has been facing a liquidity crisis that has raised concerns about potential financial contagion, is taking steps to address its situation. The company has enlisted the services of KPMG LLP to conduct an audit of its balance sheet and explore debt restructuring options, according to sources familiar with the matter.
In late July, Zhongzhi Enterprise Group Co. engaged KPMG to review its balance sheet. This move comes in response to a deteriorating liquidity situation that the company has been grappling with. The liquidity crunch has raised concerns about the potential for wider financial instability.
Following the review of its balance sheet, the Beijing-based company intends to undertake a restructuring of its debt and sell off assets. These measures are aimed at generating the necessary funds to repay investors who have invested in the company’s products.
Zhongzhi Enterprise Group Co. manages a substantial amount of assets, with its holdings totaling more than 1 trillion yuan (approximately $137 billion).
As of now, it remains unclear how many of Zhongzhi’s products have experienced default, and whether the company possesses sufficient assets that could cover potential shortfalls if it were to be liquidated. The situation is complex, and the exact details are yet to be fully disclosed.
Given the complexity of the situation and the potential impact on investors and the financial system, any restructuring process that Zhongzhi undergoes is likely to be a lengthy and intricate one.
In the face of these challenges, Zhongzhi Enterprise Group Co. has reportedly suspended payments on nearly all of its products. This step is indicative of the seriousness of the liquidity crunch and the need to address its financial obligations in a comprehensive manner.
The Chinese firm, Zhongzhi Enterprise Group Co., did not respond to emails seeking a comment on the matter. Additionally, attempts to reach out to KPMG for comment went unanswered.
Zhongzhi Enterprise Group Co., a major player in China’s private wealth management sector, is the latest financial entity to confront the possibility of failure as the repercussions of a deepening property market downturn spread. This situation is reflected in the turmoil faced by other large companies in the financial and real estate sectors.
For instance, Country Garden Holdings Co., which was previously China’s largest property developer, is currently teetering on the edge of default. The company’s sales have experienced a significant decline, and it missed an initial deadline to make coupon payments on its dollar-denominated bonds.
In response to concerns about potential financial contagion, Chinese authorities have taken action by establishing a task force dedicated to assessing the risks associated with Zhongzhi Enterprise Group Co. While not widely recognized outside of China, Zhongzhi is a significant player in the country’s trust industry, which is valued at approximately $2.9 trillion. Many of the trust products within this industry are backed by real estate projects managed by struggling developers, including companies like China Evergrande Group.
The broader context indicates that the challenges faced by Zhongzhi and other companies in the Chinese financial landscape are emblematic of the complex interplay between the property market, the trust industry, and potential repercussions for the broader economy. The authorities’ move to set up a task force underscores the concerns about systemic risks and the need to manage the potential fallout from these challenges.
The situation involving Zhongzhi Enterprise Group Co. and its associated entities is having far-reaching consequences on the Chinese financial landscape.
One of the companies linked to Zhongzhi, Zhongrong International Trust Co., has experienced difficulties of its own. The company has defaulted on payments for numerous products and has not presented an immediate plan to compensate its clients for these defaults. Zhongrong International Trust Co. manages a portfolio of 270 high-yield products with a total value of 39.5 billion yuan (approximately $5.4 billion) that are due for payment within this year.
This crisis within the shadow banking system is exacerbating a broader selloff in Chinese financial markets, which are already facing pressure due to disappointing economic data and a declining property market. While China’s leadership has expressed their commitment to bolstering domestic consumption and supporting the private sector, no new stimulus measures have been announced to date.
Additionally, the increasing number of Chinese local corporate bond defaults is contributing to the overall stress in the financial system. This has led to the ongoing decline in the MSCI China Index, which experienced a 0.8% drop on a particular Thursday morning, marking its fifth consecutive day of losses. Furthermore, the offshore yuan is nearing a historic low against the US dollar, adding to the overall economic uncertainties.
The interconnectedness of these issues showcases the intricate challenges faced by China’s financial system, which involve the shadow banking sector, property market concerns, broader economic indicators, and the impact on global financial markets.
The absence of substantial stimulus measures and the accumulation of defaults are contributing to the instability observed in various sectors of the Chinese economy.
China’s trust industry functions by aggregating funds from affluent households and corporate clients, which are then utilized to provide loans and invest in various assets such as real estate, stocks, bonds, and commodities.
According to Bloomberg Economics, the trust sector has a significant exposure to real estate, accounting for approximately 2.2 trillion yuan or about 10% of the total assets as of the end of 2022. Zhongrong International Trust Co. is ranked as the ninth-largest trust company in China, holding around 600 billion yuan in assets.
With these financial issues at play, there is increasing pressure on the government led by President Xi Jinping to mitigate the risks of financial contagion and to prevent potential social unrest.
A demonstration took place outside Zhongrong’s office in Beijing, where around two dozen individuals protested. This public display of outrage is noteworthy, as China has historically displayed little tolerance for dissent and public protests.
Products offered by Zhongrong often provided relatively high annual interest rates, sometimes reaching as much as 7%. These returns attracted mainly wealthy individuals and companies, who considered these investments as safe havens amidst the turmoil experienced in the Chinese stock and real estate markets.
A video clip of the protest captured the voice of a woman questioning why the company had not fulfilled its repayment obligations, reflecting the frustration and concern of investors who have been left in a precarious financial situation.
These developments illustrate the complex challenges faced by China’s financial system, the interplay between various asset classes, the expectations of investors, and the potential for economic and social repercussions.
