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The Chinese banking giant in the shadows is warning investors of missed payments

(Bloomberg) — One of China’s largest private wealth managers has raised fresh concern about the health of the country’s shadow banking industry after it missed payments on several high-yielding products.

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Three companies said late Friday that they had failed to receive payments on products issued by companies linked to Zhongzhi Enterprise Group Co, which has about 1 trillion yuan ($138 billion) in assets under management. One trust company, Zhongrong International Trust, bought stakes in real estate projects last year in a bet on recovery.

Investors are already concerned about the health of the Chinese economy and financial markets. Country Garden Holdings, one of the country’s largest developers, is on the brink of default, while loans from Chinese banks fell to their lowest level since 2009 last month. The real estate market is experiencing a renewed slowdown as economic growth slows.

Missed payments are likely to add to concern about the health of China’s $2.9 trillion trust industry, which combines characteristics of commercial and investment banking, private equity and wealth management. Companies in this sector pool household savings to make loans and invest in real estate, stocks, bonds and commodities.

Shen Ming, director at Chanson & Co., said: “The biggest problem now is how to isolate the risks associated with Zhongzhi Group so that they don’t cause the confidence of the entire trust industry to collapse.” As it continues to deteriorate, expect the stakes to be no less than what happens when a leading real estate developer defaults.”

The trust industry, which wealthy Chinese once saw as a safe place to deposit their money for huge returns, has over the past years been a growing concern for authorities who have sought to rein in its reach. The industry has been plagued by missed payments over the past years, particularly in real estate-related investments.

Read more: China Orders Surprise Review of $3 Trillion Trust Industry

Chinese stocks fell, with the CSI 300 index continuing its biggest loss since October, while the yuan fell towards its weakest level this year.

Zhongzhi was founded in Beijing in 1995 by Xie Zhikun who has built the company into a sprawling empire. Xie died of a heart attack in 2021, just as the Covid-19 virus and pandemic lockdowns slowed China’s economy and increased volatility in the capital markets. While replacement Liu Yang pledged to keep the company’s strategic focus on industrial and asset management businesses unchanged, the economic downturn and downturn in the real estate market affected its operations.

Zhongzhi is the second largest shareholder of Zhongrong Trust, with ownership of about 33%. The group also owns stakes in five other licensed financial firms, including a mutual fund manager and two insurance companies, and has invested in five asset management companies and four wealth units, according to its website. It also controls listed companies and holds 4.5 billion tons of coal reserves among its industrial operations.

Zhongrong Trust alone has 270 products with a total value of 39.5 billion yuan due this year, according to data provider Use Trust. The average return on those products was 6.88%, compared to the standard rate of 1.5% on one-year deposits paid by banks.

fake messages

The trusted company said it was aware of fake messages being posted on social media stating that the company could no longer operate, and the company had reported them to the authorities, according to a statement on its website.

In an unverified message circulated on social media, a wealth manager at Zhongzhi apologized to his clients, saying the group’s wealth arms had decided to delay payments on all products since mid-July. The letter said the accident involved more than 150,000 investors with outstanding investments totaling 230 billion yuan.

A prolonged slump in China’s real estate sector has left once-safe real estate developers to their knees. The sector is caught in a vicious cycle as failed developers turn homebuyers away from their purchases, which then hinders the companies’ cash flow. Home sales fell the most in a year in July.

Gary Ng, chief economist at Natixis, said the missed payments show “how the real estate liquidity problem can create a domino effect on other sectors, including the trust industry.” “It wouldn’t be surprising to see more trusts with a high asset allocation to real estate having payment problems.”

The National Administration for Financial Regulation, Zhongrong Trust and parent Zhongzhi Group did not immediately respond to requests for comment.

Read more: Fan fears the loss of a country garden in the Chinese real estate market

Nacity Property Service and KBC Corp. announced. For the first time reported the news of delayed payments by Zhongrong International Trust Co in two statements on Friday evening. KBC, a carbon products manufacturer, said in a statement to the Shanghai Stock Exchange that the late payments are related to 60 million yuan invested with Zhongrong Trust.

Another listed company said on Friday that payments on a wealth product it bought from a Zhongzhi unit were overdue this month and it would take legal action to recoup the investment losses.

Zhongrong Trust, which managed 786 billion yuan in assets as of Dec. 31, said its business faced a “relatively high level” of credit risk in 2022 as counterparty liquidity pressures and refinancing difficulties eroded its ability to meet payments, according to its report. annual. Report for the year.

Real estate accounted for 11% of the Zhongrong Trust’s assets, following 42% in industries and 33% in financial institutions, according to its annual report. The company was previously fined 200,000 yuan by regulators for investing in a real estate project that lacked relevant approvals, and has vowed to improve compliance.

property investment

Trust companies, including Zhongrong Trust and MinMetals Trust Co., Ltd. , took stakes in at least 10 real estate projects last year, and is betting that the unfinished homes will eventually generate cash to pay back some of the $230 billion in property-backed money they have issued to investors.

The CSI 300 Index fell 1.3% at the midday break, while the Hang Seng China Enterprise Index fell 2.8%. The yuan was 0.3 weaker at 7.258 per dollar.

– With help from Qingqi She and Zheng Li.

(Updates to add quotes from the fifth paragraph.)

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