One of China’s biggest shadow banks skipped payments on several investment products, sparking rare protests in Beijing as the fallout from a deepening property slump spreads to the financial sector.
(Bloomberg) — One of China’s biggest shadow banks skipped payments on several investment products, sparking rare protests in Beijing as the fallout from a deepening property slump spreads to the financial sector.
Zhongrong International Trust Co. missed payments on dozens of products and has no immediate plan to make clients whole, indicating troubles at the embattled Chinese shadow bank are deeper than previously known.
Pressure is building across China’s financial markets given a slew of disappointing economic data, renewed concerns about the property sector and the unfolding crisis in the shadow banking system. Investors are calling for more aggressive easing by Beijing as the incremental policies have so far failed to revive confidence.
A selloff in Chinese assets deepened on Wednesday, with the MSCI China Index down as much as 1.3%. Chinese authorities asked some investment funds this week to avoid being net sellers of equities, as the rout in the nation’s financial markets deepened, people familiar with the matter said.
Investor focus is now shifting to Zhongrong. Wang Qiang, board secretary of the firm partly owned by financial giant Zhongzhi Enterprise Group Co., told clients in a meeting earlier this week that the firm missed payments on a batch of products on Aug. 8, adding to delays on at least 10 others since late July, according to people familiar with the matter. At least 30 products are now overdue and Zhongrong also halted redemptions on some short-term instruments, one of the people said.
The company doesn’t have an immediate plan to cover the payments since its short-term liquidity has suddenly dried up, Wang said. He added that the number of products with missed payments has risen and the company is facing a “tsunami” of questions from investors and their own wealth managers, according to the people familiar, who asked not to be identified because the meeting was private. Wang asked for patience as the firm seeks to recoup the value of its investments.
The increased delays signal that the troubles at Zhongzhi, which manages $138 billion, are deeper than initially thought as only three clients so far have publicly revealed missing payments by the two firms. Chinese authorities have already set up a task force to study any possible contagion, with the banking regulator examining risks at Zhongzhi, people familiar with the matter said earlier.
Zhongrong didn’t respond to requests for a comment.
“Given the recent net asset value markdowns and redemptions, we expect growth in trust products to slow, which could result in tighter property financing conditions, and affect banks’ earnings and balance sheets,” Goldman Sachs Group Inc. analyst Shuo Yang wrote in a note.
Some Zhongrong investors are now losing patience. Many bought the products paying out as much as 7% in annual interest, betting they would be a safe bet as Chinese stocks and real estate prices tumble.
About two dozen people protested outside the firm’s office, in a rare show of public outrage after the missed payments. In one of the video clips posted on Wechat seen by Bloomberg News, a woman angrily asks: “Why doesn’t the company pay us back?” she says. “It has already matured. Your financial statements said there is a profit.”
One woman is heard shouting: “Give us the money back, or we will die here.” Another says: “Why you don’t give us a clear explanation?”
The liquidity challenges underscore how troubles in the property sector, and China’s weakening economy, are now spreading deeper into the financial industry. Many trust products are backed by real estate projects run by troubled developers such as China Evergrande Group.
Zhongrong is among the biggest firms in the country’s $2.9 trillion trust industry, which pools savings from wealthy households and corporate clients to make loans and invest in real estate, stocks, bonds and commodities. The firm has 270 high-yield products totaling 39.5 billion yuan ($5.4 billion) due this year, according to data provider Use Trust.
Read more: CHINA INSIGHT: 3 Trillion Reasons Trust Industry Shock Not Over
Wang dismissed online rumors that it has stopped making payments on all its products.
Liquidity has dried up “unexpectedly,” making it hard to meet short-term debt obligations as most of the underlying assets are long-term and illiquid, he said. The products bear some resemblance to a “funding pool,” he said, referring to a previously widespread practice where proceeds from new products are used to pay other investors. This method was banned by regulators a few years ago.
Zhongrong is now seeking to limit the fallout from the defaults and ensure the stability of its operations, which can in turn help with repayments, Wang said.
Zhongzhi is among private wealth managers that Beijing has been trying to rein in for years to minimize risks for the hundreds of thousands of retail clients who buy these products assuming they’re safe.
China is already struggling with a weak economy and fallout from the property slump that’s threatening to push giants like Country Garden Holdings Co. into default. The central bank on Tuesday cut interest rates by the most in three years in a bid to revive growth. New home prices meanwhile dropped for a second straight month in July.
Read more: Why Crisis at China Trust Firm Stokes Contagion Fears: QuickTake
According to Bloomberg Economics, the trust sector’s exposure to real estate is about 2.2 trillion yuan, or 10% of total assets as of the end of 2022. Zhongrong is the ninth-biggest trust, with about 600 billion yuan in assets.
“The big danger is that a negative feedback loop kicks in, with property stress causing strains in the financial system, undermining credit expansion and depressing growth, which, in turn, exacerbates the slump in the property sector,” Bloomberg Economics said in a note.
–With assistance from James Mayger and Colum Murphy.
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