Chinese shadow bank Zhongzhi Enterprise Group – a victim of the country’s intensifying property crisis – has filed for bankruptcy liquidation after failing to repay substantial debts.
A Beijing court said on Friday (January 5) that Zhongzhi applied for bankruptcy on the grounds it could not pay its due debts and its assets were insufficient to pay all its debts.
The court said it accepted Zhongzhi’s bankruptcy liquidation application in accordance with China’s enterprise bankruptcy law.
The worsening woes at Zhongzhi, a major player in China’s $3 trillion shadow banking sector – roughly the size of the French economy – add to worries that the country’s property debt crisis is spilling over into the broader financial sector.
The company, which has sizable exposure to China’s real estate sector, apologised to its investors in a letter in November that said it was heavily insolvent with up to $64 billion in liabilities.
Police in Beijing, where the firm is based, later launched an investigation into suspected crimes committed by Zhongzhi and said it was looking into “many” suspects involved with the company.
Zhongzhi did not immediately respond to a request for comment.
China’s highly indebted property sector has been reeling from a liquidity crunch since 2020. Defaults by developers since late 2021 have impeded economic growth and rattled global markets.
Shadow banking-linked wealth managers in China typically operate outside many of the rules governing commercial banks and mainly channel the proceeds of wealth products sold to retail investors to real estate developers and other sectors.
Signs of Zhongzhi’s problems emerged in July when Zhongrong International Trust, a leading trust company controlled by Zhongzhi, missed payments on dozens of investment products.
In August, Zhongzhi told investors it faced a liquidity crisis and would conduct a debt restructuring. The management said the plan is for “self-rescue” through restructuring, with a focus on debt collection and asset liquidation, but bankruptcy is also an option.
The latest development would help the group to speed up asset liquidation, Ying Yue, a lawyer at Leaqual Law Firm, said.
Yet the court process is expected to be slow, and investors will likely incur hefty discount in the repayment plan and may only be able to recover 30% of their money, based on precedent cases, Ying said.
Last month, Hywin Holdings Ltd, a smaller wealth manager whose products are primarily invested into real estate, said that it has been unable to promptly fulfil client redemption requests.
- Reuters with additional editing by Jim Pollard