China’s banking regulator has set up a task force to examine risks at Zhongzhi Enterprise Group Co., one of the nation’s top private wealth managers, after a unit missed payments on multiple high-yield investment products.
(Bloomberg) — China’s banking regulator has set up a task force to examine risks at Zhongzhi Enterprise Group Co., one of the nation’s top private wealth managers, after a unit missed payments on multiple high-yield investment products.
The National Financial Regulatory Administration established a working group last month to gauge the outstanding debt and risks at one of the main financing arms of Beijing-based Zhongzhi, which oversees more than 1 trillion yuan ($138 billion) of assets, according to people familiar with the matter, who asked not to be identified discussing a private matter.
The regulator required Zhongrong International Trust Co. to report its plans for future payments and available assets that can be disposed of to deal with the liquidity crunch, said the people. Nearly half of the funds raised by Zhongrong were funneled to its parent or affiliated units, one of the people said.
The task force underscores the extent to which officials have become alarmed by the situation at Zhongzhi, whose troubles have surged to the fore in recent days after several of its corporate clients disclosed overdue trust payments. The episode has put a fresh spotlight on China’s $2.9 trillion trust industry, which combines characteristics of commercial and investment banking, private equity and wealth management.
Firms in the sector pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. Zhongrong Trust alone has 270 products totaling 39.5 billion yuan due this year, according to data provider Use Trust. The average yield on those products amounted to 6.88%, compared with the benchmark 1.5% one-year deposit rate paid by banks.
The NFRA, Zhongrong Trust and Zhongzhi group didn’t respond to requests seeking comment.
Real estate accounted for 11% of Zhongrong’s 629 billion yuan of trust assets under management, following 42% in industries and 33% in financial institutions, according to its annual report. The company was previously fined 200,000 yuan by regulators for investing in a property project that lacked relevant approvals, and pledged to improve compliance.
China’s top auditor last year conducted a review of the trust industry, paving the way for a potential overhaul of a key shadow banking sector where losses on property loans are mounting.
Trust firms have defaulted on tens of billions of dollars of investment products linked to property developers, which were sold to wealthy Chinese, according to Use Trust.
In one unverified letter being circulated on social media, a wealth manager at Zhongzhi apologized to his clients, saying the group’s wealth arms have decided to delay payments on all products since mid July. The incident involves more than 150,000 investors with outstanding investments totaling 230 billion yuan, according to the letter.
Zhongzhi was founded in 1995 by Xie Zhikun, who built the firm into a sprawling empire. Xie died of a heart attack in 2021, just as Covid-19 and pandemic lockdowns slowed China’s economy and increased volatility in its capital markets. While his replacement Liu Yang vowed to keep the company’s strategic focus on industrial and asset management businesses unchanged, the economic slowdown and the property-market slump have weighed on its operations.
Zhongzhi is the second-largest shareholder of Zhongrong Trust, with its ownership at around 33%. The conglomerate also holds stakes in five other licensed financial firms, including a mutual fund manager and two insurers, and invested in five asset management companies and four wealth units, according to its website. It also controls listed companies and owns 4.5 billion tons of coal reserves among its industrial operations.
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