One of China’s largest wealth management companies has told investors it can’t pay its bills, reigniting fears that the country’s real estate slump, which has played havoc with global log export markets, may spill over into the $3 trillion “shadow banking” sector.
As reported by Reuters overnight, Zhongzhi Enterprise Group (ZEG) confirmed that it was “severely insolvent”, with ZEG apologising for “ineffective internal management” after missing several repayments to creditors.
Starting as a timber conglomerate, Zhongzhi expanded into various businesses, including healthcare, new energy vehicles and finance. Its financial businesses include trust, asset management, insurance, futures, and wealth management.
The group is what Reuters describe as “a shadow banking empire,” managing more than 1 trillion yuan (US $136.85 billion) in assets with tentacles in a range of businesses, including financial services, mining, electric vehicles and timber and forestry (albeit a much smaller scale).
The Beijing-based company has significant exposure to China’s ailing property sector, with the scale of its debt “huge.” It has pegged its total liabilities at up to 460 billion yuan ($65 billion) against assets of 200 billion yuan.
“Since the group’s assets are concentrated in debt and equity investments and have a long duration, collection is difficult, the expected recoverable amount is low, liquidity is exhausted, and asset impairment is serious,” ZEG added in a letter sent to shareholders.
Analysts have estimated that the trust industry, or “shadow banking” sector, is worth $2.9 trillion, making it bigger than the French economy.
Shadow banks typically provide financing through off-balance-sheet activities or non-bank financial institutions like trust firms.
A mysterious and enormous part of China’s financial landscape, the “shadow banking” sector, has come under the spotlight as concerns swirl about the future of the world’s second-biggest economy, which is grappling with a protracted real estate crisis.
Investors in these wealth management products in China tend to be middle and upper-middle-class people overwhelmingly, experts have said, and any defaults or even concerns caused by delayed payments could dampen consumer confidence.
It comes as Wood Central has reported in recent weeks that a drop in Chinese demand for sawn wood has led to a slowdown in exports from several global markets – including Russia, PNG, Central Africa and most recently, Afghanistan.
A key part of China’s Belt and Road Initiative, Wood Central understands the country’s “shadow banking sector” and provides loans to Chinese businesses (rather than government development loans) to invest in forest-based enterprises across Central Africa, Asia Pacific, and Eurasia.
The push to “investment loans” (rather than more high-profile government development loans), according to the Chinese government, is allegedly part of a pivot towards “smaller and greener projects”, which reduces the state’s exposure to default on large loans.
