Zhongzhi Group, a Chinese asset management giant, has reportedly told investors that the company is facing a liquidity crisis, has stopped payments on its wealth management products, and will undertake debt restructuring work, becoming the latest financial giant to face a crisis.
According to a Reuters report, a conference video showed Zhongzhi executives telling investors at a meeting on Wednesday (Aug 16) that they have hired one of the Big Four accounting firms to conduct a comprehensive audit of the company since last month, and are looking for strategic investors. They cannot determine if the company is insolvent before the audit is completed.
The company added that it currently plans to save itself through reorganization, focusing on debt collection and asset liquidation. Bankruptcy is also an option, but they did not disclose the amount of debt that needs restructuring.
Bloomberg, citing informed sources, said that with liquidity tightening, Zhongzhi hired KPMG at the end of July to evaluate its balance sheet.
Since the end of July, dozens of investment products from ZhongRong International Trust, a subsidiary of Zhongzhi Holding, have defaulted on payments, with overdue amounts close to 1 billion yuan (S$187.1 million). Anxious retail investors in China have asked listed companies about their risk exposure to ZhongRong Trust.
Over 20 people gathered outside ZhongRong’s Beijing office this week to protest. A video shows a woman angrily asking: “Why doesn’t the company repay us?”
Zhongzhi Group is a huge capital empire covering finance, investment, wealth management, new finance and other industries. Its total assets once exceeded 1 trillion yuan. It holds stakes in five asset management companies, four wealth management companies and ZhongRong International Trust. ZhongRong International Trust manages over 700 billion yuan in assets and has extensive real estate businesses.
In recent years, China has cracked down on high-risk shadow banking activities. Coupled with the continued downturn in the real estate market, this has put liquidity pressure on Zhongzhi Group’s businesses, highlighting the unprecedented debt crisis in China’s real estate industry and its ripple effects.
Some industry insiders and economists believe that China’s official housing price indices may underestimate the depth of the real estate downturn, and the actual situation may be much worse than the official data, partly due to the long-standing calculation methods that struggle to capture inflection points in the market.
Zhongzhi Group’s financial problems will be the latest challenge facing the Chinese government. China’s banking regulator is said to have set up a special working group to review risks related to Zhongzhi, signaling official concern that the crisis may spread.
China’s shadow banking industry is worth up to US$3 trillion. Asset management companies like Zhongzhi sell high-yielding investment products associated with shadow banking through their trust and wealth management arms, and have close ties to banks and other financial companies. A series of defaults could have a contagion effect on the Chinese economy.
Some investors say dozens of people in Beijing, Sichuan, Jiangsu, Shandong and other places who purchased Zhongzhi’s wealth management products have received “friendly visits” from local police at their homes in recent weeks, urging them not to protest publicly. This is the latest sign of official concern about potential social unrest amid growing worries over the spread of the financial crisis in China.