Fears rise as top China wealth manager misses payments

One of China’s prominent private wealth management firms is causing concerns about the stability of the country’s shadow banking sector after it failed to make payments on multiple high-yield investment products. This event has drawn renewed attention to China’s $2.9 trillion trust industry, a hybrid of commercial and investment banking, private equity, and wealth management, which pools savings to offer loans and invest in real estate, stocks, bonds, and commodities.

The missed payments revolve around products connected to companies affiliated with Zhongzhi Enterprise Group Co., an entity managing approximately 1 trillion yuan ($138 billion) in assets. Among the companies affected is Zhongrong International Trust, which had invested in real estate projects in anticipation of a market recovery that has yet to materialise.

The occurrence of missed payments has raised concerns among already jittery markets. China’s $2.9 trillion trust industry has experienced turbulence in recent years due to regulatory measures aimed at reining in shadow banking activities. This latest event has compounded market anxieties related to China’s economy and property market. The situation is exacerbated by potential default risks, such as the looming default of one of China’s largest developers, Country Garden Holdings Co., and the decline in loans extended by Chinese banks, which hit a low not seen since 2009.

The confluence of these financial uncertainties is putting pressure on the government to prevent contagion and restore investor confidence. Chinese stocks fell, and the yuan depreciated as markets reacted to the news.

Experts suggest that the challenge now lies in containing the risks associated with Zhongzhi group in order to prevent a collapse of confidence in the entire trust industry. If the situation worsens, it could have repercussions comparable to those seen when a prominent property developer defaults.

The trust industry, once considered a secure avenue for wealthy Chinese to secure high returns, has increasingly become a concern for regulators aiming to rein in its expansion. While trust companies have faced issues with missed payments in the past, this event has raised concerns about the industry’s stability, particularly in relation to real estate investments.

Zhongzhi Enterprise Group, founded in 1995 by Xie Zhikun, expanded into a conglomerate under his leadership. After his passing in 2021, Zhongzhi has faced economic slowdowns and a property market slump, impacting its operations. The group holds significant stakes in various financial companies and has invested in asset management and wealth units.

The missed payments have drawn attention to how liquidity issues in the real estate sector can trigger ripple effects across industries, highlighting the interconnectedness of various sectors in China’s financial landscape.

As markets react to this development, China’s government faces increasing pressure to manage risks and maintain market stability.