Chinese Shadow Bank Zhongzhi Files for Bankruptcy
In the midst of China’s deepening property market challenges, Zhongzhi Enterprise Group, a significant player in the country’s $3 trillion shadow banking sector, has filed for bankruptcy liquidation. The move comes as Zhongzhi faces mounting difficulties in repaying debts, signaling potential repercussions of the property market downturn on the broader financial sector.
The bankruptcy application, citing an inability to meet outstanding debts and insufficient assets to settle all financial obligations, was accepted by a Beijing court in accordance with China’s enterprise bankruptcy law, as revealed in a statement on Friday.
Zhongzhi’s financial struggles, with substantial exposure to China’s real estate sector, contribute to growing concerns that the property debt crisis is extending its impact beyond the real estate domain and infiltrating other financial sectors.
The company acknowledged its dire financial situation in a letter to investors in November, apologizing for insolvency with liabilities reaching up to $64 billion. Subsequently, an investigation into suspected crimes involving Zhongzhi was launched by Beijing police, examining numerous individuals associated with the company.
Zhongzhi, a prominent figure in shadow banking, operated in a sector equivalent to approximately $3 trillion, roughly the size of the French economy. The recent development accelerates the asset liquidation process for the group.
China’s heavily indebted property sector has grappled with a liquidity squeeze since 2020, and developer defaults since late 2021 have not only hindered economic growth but also sent ripples through global markets.
Wealth management firms connected to shadow banking in China typically function outside the regulatory scope governing commercial banks. They predominantly direct funds from wealth products sold to retail investors toward real estate developers and other sectors.
Zhongzhi’s challenges first surfaced in July when Zhongrong International Trust Co, a major trust company under Zhongzhi’s control, missed payments on numerous investment products. By August, Zhongzhi informed investors of a liquidity crisis and announced plans for debt restructuring, emphasizing a focus on “self-rescue” through restructuring, debt collection, and asset liquidation, with bankruptcy being a potential option.
While the bankruptcy filing could expedite asset liquidation, legal experts anticipate a protracted court process. Investors may face significant discounts in the repayment plan, with a potential recovery of only around 30% of their invested funds based on precedent cases.
