China Heading Towards Imminent Financial Crisis? Another Big Firm Defaults On Loan Repayments

A mysterious and enormous part of China’s financial landscape, the “shadow banking” sector has come under the spotlight as concerns from global investors swirl about the future of the world’s second-biggest economy.

BEIJING: Raising concerns regarding the financial crisis triggered by the downturn in China's real estate market, Chinese investment firm  Zhongrong Trust, which managed USD 87 billion worth of funds for corporate clients and wealthy individuals as of the end of 2022, had failed to pay the interest and principal on several investment products, CNN reported. The scale of payments missed exceeded 110 million yuan ($15 million), according to their statements.

Zhongrong Trust — another major Chinese investment firm — has missed payments to corporate investors, sparking a rare protest in Beijing, CNN reported. At least three Chinese companies — Nacity Property Service, KBC Corporation and Xianheng International Science and Technology — said in separate stock exchange filings in recent weeks that Zhongrong Trust has encountered difficulties in meeting obligations to its corporate investors.

They are considered part of the “shadow banking” industry, a sector that forms an important source of finance in China. The term usually refers to financing activity that takes place outside the formal banking system, either by banks through off-balance-sheet activities, or by non-bank financial institutions, such as trust firms.

A mysterious and enormous part of China’s financial landscape, the “shadow banking” sector has come under the spotlight as concerns from global investors swirl about the future of the world’s second-biggest economy, according to CNN. Moreover, concerns regarding Zhongrong have grown this week since the appearance of social media videos showing a protest outside its office in Beijing.

About a dozen angry demonstrators were recorded chanting slogans and demanding payment related to investment products issued by the company, according to videos posted on social media app Douyin and WeChat, CNN reported. The videos appear to have been uploaded on Wednesday and Thursday. However, the company hasn’t responded to a CNN request for comment.

On Monday, Zhongrong issued a statement saying “criminals” had sent false notices to customers about the cancellation of investment products. It warned investors to be vigilant of fraud but has not commented on the issue of missed payments to investors. Zhongrong is linked to the Zhongzhi Group, one of China’s largest private conglomerates with operations in financial services, mining and electric vehicles. The group’s core financial units have more than one trillion yuan (138 billion USD) of funds under management, according to a statement posted on its website in December.

News of Zhongrong’s missed payments set off panicked responses on social media, as it further added fuel to the online speculation from earlier this year that Zhongzhi Group had suffered a liquidity crunch and stopped repayment on some of its numerous investment products, CNN reported. In recent days, investors have poured into the online forums hosted by the Shanghai and Shenzhen stock exchanges, asking many listed companies whether they had any exposure to Zhongrong’s products.

Investors were afraid of “contagion” spreading to the country’s 2.9 trillion USD investment trust industry, CNN reported citing a research report by Citi analysts. Notably, this has happened because the industry has long been exposed to China’s troubled real estate sector, currently mired in its worst-ever slump.

But “systemic risks” were limited, the analysts added, and possible trust defaults were unlikely to bring about China’s “Lehman moment,” a reference to the 2008 collapse of the bank that marked a major worsening of the global financial crisis, CNN reported. According to the China Trustee Association, the total exposure of all trust funds to the property sector was estimated at 1.13 trillion yuan (154 billion USD) by the end of March, accounting for about 5 per cent of the total value of trust funds in the country.

“It is fair to say that given the latest developments related to Zhongzhi, its subsidiaries, and other wealth management firms, this 1.13 trillion yuan worth of funds…is now under great threat,” CNN quoted Nomura analysts from a research report. “The turmoil is likely to cause further headwinds to [economic] growth,” they added.