BEIJING, Nov 23 (Reuters) – China’s Zhongqi Enterprise Group, a leading wealth management firm, has told investors it is deeply bankrupt with liabilities amounting to $64 billion, threatening to reignite fears that the country’s mortgage debt crisis is spilling over into the financial sector. Wider. .
The company, which has significant exposure to the real estate sector in China, apologized to its investors in a letter in which it said that its total liabilities ranged from about 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion).
The liabilities compare with Zhongqi’s total assets estimated at about 200 billion yuan, according to the letter issued on Wednesday and seen by Reuters.
Beijing-based Zhongqi did not immediately respond to a Reuters request for comment.
Worsening problems at Zhongqi, a major player in China’s $3 trillion shadow banking sector – roughly the size of France’s economy – are expected to raise concerns about contagion, although some analysts expected regulators to step in to stop… Wider implications.
China’s debt-laden real estate sector has been suffering from a liquidity crisis since 2020. Developers’ defaults since late 2021 have hindered economic growth and shaken global markets.
Wealth managers associated with shadow banking in China typically operate outside many of the rules governing commercial banks, primarily funneling proceeds from wealth products sold to retail investors to real estate developers and other sectors.
Signs of trouble at Zhongzhi Group first emerged in July when Zhongrong International Trust Co, a leading trust controlled by Zhongzhi, defaulted on payments on dozens of investment products.
“The gap in their books is huge,” said Xu, an investor in one of Zhongrong’s credit products, who would only give her surname because of the sensitivity of the matter. “The company was a mess.”
Zhongzhi, whose business interests span from mining to wealth management, said in the letter that since the group’s assets are concentrated in long-term debt and equity investments, it is difficult to liquidate them and book returns.
He added, “Initial inspections show that the group is seriously insolvent and faces significant ongoing operational risks. The resources available to repay debts in the short term are far less than the total volume of the group’s debts.”
“Zhongzhi Group sincerely apologizes for the losses to investors. We fully understand the urgency, importance and seriousness of resolving these systemic risks,” the group said in the letter.
High default risk
Zhongzhi had hired a Big Four accounting firm to conduct an audit of the company, and was looking for strategic investors, its management told investors at a meeting in August, according to a video seen by Reuters at the time.
Zhongrong Fund’s core assets are largely related to real estate, which carries a high default risk, said Xing Zhaoping, chief China strategist at ANZ Bank.
“The company cannot recover the money amid the real estate problems. So there are significant write-downs on its assets.”
Zhongzhi started out in timber trading and real estate in the 1990s, and quickly expanded into businesses ranging from chipmaking, healthcare, new energy vehicles and finance, according to its website.
Its financial businesses include trust, asset management, insurance, futures and wealth management.
Zhongzhi has sold stakes in some listed companies it controlled over the past few years and reduced the size of its business, after coming under pressure in the wake of China’s crackdown on shadow banking and a slump in the property market.
“Financial regulators will almost certainly intervene forcefully if there is any sign of Zhongzi’s problems spreading,” said Christopher Beador, deputy director of China research at Gavical Dragonomics.
He added that the trust industry represents only about 5% of the total financial system, so problems there are not necessarily life-threatening.
Beddor said the chance of investors getting full repayment of their investments is slim. “Officials could certainly make retail investors whole if they wanted to, but they would essentially be turning their backs on years of attempts to undermine implicit guarantees. I suspect they would not.”
($1 = 7.2111 Chinese yuan)
(Reporting by Ziyi Tang and Ryan Wu; Preparing by Muhammad for the Arabic Bulletin) Editing by Sumit Chatterjee and Muralikumar Anantharaman
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