China’s shadow banking crisis sparked by defaulting property developers could trigger broader threat to economy, analysts warn

Missed payments by Zhongrong International Trust are ‘a ripple effect of the intensifying cash crunch faced by property developers like Country Garden,’ says analyst Shen Meng
Further shadow banking defaults could hurt investor and market sentiment, putting China’s near-term financial stability to the test

Banking & finance

Yuke Xiein Beijing

Published: 12:34pm, 18 Aug 2023

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Macroeconomic headwinds and a slew of defaults in the property sector have sparked concerns that a liquidity crisis rattling China’s shadow banking industry could trigger risks in the broader finance sector and challenge the country’s already weakening economy, according to analysts.

State-backed Zhongrong International Trust, one of China’s largest shadow banks, missed payments on more than 30 wealth management products amid reports of liquidity problems faced by its controlling shareholder Zhongzhi Enterprise Group, a huge financial conglomerate.

“Zhongrong’s troubles can be viewed as a ripple effect of the intensifying cash crunch faced by property developers like Country Garden as the government continues to deleverage the sector,” said Shen Meng, director at Beijing-based investment firm Chanson & Co.

“Zhongrong’s business model of providing financing to troubled developers is actually quite common for Chinese trust firms.

“The collapse of Zhongrong or another large wealth management company could dampen investor confidence in China’s shadow banking system, leading to collateral damage to other trust firms, even the ones that have relatively healthy balance sheets.”

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Neither Zhongrong nor Zhongzhi responded to the Post’s requests for comment.

A liquidity crisis in the trust industry could have far-reaching consequences for the broader economy. Retail investors with exposure to Zhongrong products could see their wealth diminish, listed companies could see reduced capital for growth and investment, while local governments, already saddled with debt problems, could face further hurdles when implementing measures to prop up China’s declining economy, said Shen.

On Wednesday, a small crowd of people reportedly protested outside the firm’s office in Beijing after it skipped payments on dozens of investment products.

According to Zhongrong’s annual report, of its 629 billion yuan (US$86.2 billion) of managed assets in 2022, close to 11 per cent were invested in real estate. The Harbin-based company was also a major shareholder in several property projects of defaulted developers, such as Shimao Group Holdings and Sunac China Holdings.

Zhongrong’s crisis came just a few days after Country Garden, once China’s largest developer by sales, disclosed its own repayment troubles and halted the trading of its bonds on Chinese exchanges.

On August 11, Country Garden issued a profit warning saying it expected to report a net loss of as much as HK$55 billion (US$7.03 billion) for the first half of 2023. It is also reportedly on the brink of restructuring.

And Yang Huiyan, Country Garden’s chairwoman, said the company is facing the biggest challenges since its establishment.

The financial crisis at Zhongrong does not appear at first glance to be of systemic concern as “the size of the company’s 629 billion yuan assets under management and the number of affected products [are] relatively small compared to China’s 21 trillion yuan trust industry and the larger banking sector,” said a report published on Thursday by CreditSight, a New York-based credit research company.

However, further defaults in China’s shadow banking sector could hurt investor and market sentiment, putting the country’s near-term financial stability to the test, according to CreditSight.

Zhongrong missed principal and income payments on 140 million yuan of wealth management products sold to several domestically listed companies, including KBC Corp, a maker of carbon products, and Nacity Property Service, according to stock exchange filings.

Zhongzhi is already in talks with KPMG to audit its balance sheet. The Beijing-based shadow banking giant, which manages over 1 trillion yuan (US$137 billion), plans to restructure its debt following the review in order to pay back its investors, Bloomberg reported, citing people familiar with the matter.