China-Based Zhongzhi Reveals Liabilities of up to USD64 Billion Amidst Property Sector Crisis
Zhongzhi Enterprise Group, a prominent wealth manager in China, has revealed significant financial troubles amidst the deepening crisis in the country's property sector.
The company disclosed in a letter to investors that it is heavily insolvent, facing liabilities of up to $64 billion, which is more than double its assets. Zhongzhi has substantial exposure to the Chinese real estate sector and expressed its apologies to investors.
The letter indicated that the firm's total liabilities range from approximately 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion), far surpassing its estimated total assets of about 200 billion yuan ($27 billion). This revelation, made public on Wednesday and reported by Reuters, has not been met with an immediate response from Zhongzhi, headquartered in Beijing.
The deteriorating financial situation of Zhongzhi, a significant player in China's shadow banking sector, which is roughly the size of the French economy at $3 trillion, raises concerns about the potential ripple effects of the property debt crisis on the broader financial industry.
China's heavily indebted property sector has been grappling with a liquidity crisis since 2020, leading to defaults by developers since late 2021, which have adversely affected economic growth and global markets.
Wealth management firms like Zhongzhi, linked to shadow banking in China, often operate with fewer regulatory restrictions than commercial banks. They mainly channel funds from wealth products sold to retail investors into various sectors, including real estate.
Troubles at the Zhongzhi group initially came to public attention in July when Zhongrong International Trust Co, a leading trust company controlled by Zhongzhi, missed payments on numerous investment products.
In its letter, Zhongzhi explained that its assets were primarily tied up in long-term debt and equity investments, making it challenging to liquidate them and generate returns. The group acknowledged its severe insolvency and significant ongoing operational risks, emphasizing the scarcity of short-term resources for debt repayment.
Zhongzhi expressed deep regret for the losses incurred by investors and stressed its commitment to addressing the overall risk. The company had engaged one of the Big Four accounting firms to conduct an audit and was actively seeking strategic investors, as revealed during a meeting with investors in August.
Founded initially in the timber and real estate sectors in the 1990s, Zhongzhi expanded its business interests to include chipmaking, healthcare, new energy vehicles, and finance. Its financial operations encompass trust services, asset management, insurance, futures trading, and wealth management.
Over the past few years, Zhongzhi has been divesting stakes in some of the listed companies it controlled and downsizing its business in response to regulatory pressures following China's crackdown on shadow banking and the downturn in the property market.
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