China finance giant's missed payments alarm regulators and markets

Task force set up after a unit of Zhongzhi Enterprise, one of nation's top wealth managers, missed payments on multiple high-yield investment products

China’s banking regulator has set up a task force to examine risks at Zhongzhi Enterprise Group, one of the nation’s top private wealth managers, after a unit missed payments on multiple high-yield investment products.

The National Financial Regulatory Administration established a working group last month to gauge the outstanding debt and risks at one of the main financing arms of Beijing-based Zhongzhi, which oversees more than 1 trillion yuan ($138 billion) of assets, according to people familiar with the matter, who asked not to be identified discussing a private matter. 

The regulator required Zhongrong International Trust to report its plans for future payments and available assets that can be disposed of to deal with the liquidity crunch, said the people. Nearly half of the funds raised by Zhongrong were funnelled to its parent or affiliated units, one of the people said.

The task force underscores the extent to which officials have become alarmed by the situation at Zhongzhi, whose troubles have surged to the fore in recent days after several of its corporate clients disclosed overdue trust payments. The episode has put a fresh spotlight on China’s $2.9 trillion trust industry, which combines characteristics of commercial and investment banking, private equity and wealth management. This confluence of risks is adding pressure on Xi Jinping’s government to shore up investor confidence. Chinese stocks slumped on Monday, with the CSI 300 Index falling for the fifth time in six sessions, while the yuan depreciated toward its weakest level this year. Analysts at JPMorgan Chase warned that the turmoil at Zhongzhi and Country Garden may create a “vicious cycle” for real estate financing in China.

Firms in the sector pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. Zhongrong Trust alone has 270 products totalling 39.5 billion yuan due this year, according to data provider Use Trust. The average yield on those products amounted to 6.88 per cent, compared with the benchmark 1.5 per cent one-year deposit rate paid by banks.

The NFRA, Zhongrong Trust and Zhongzhi group didn’t respond to requests seeking comment.

Real estate accounted for 11 per cent  of Zhongrong’s 629 billion yuan of trust assets under management, following 42 per cent in industries and 33 per cent in financial institutions, according to its annual report. The company was previously fined 200,000 yuan by regulators for investing in a property project that lacked relevant approvals, and pledged to improve compliance. China’s top auditor last year conducted a review of the trust industry, paving the way for a potential overhaul of a key shadow banking sector where losses on property loans are mounting.  Trust firms have defaulted on tens of billions of dollars of investment products linked to property developers, which were sold to wealthy Chinese, according to Use Trust.

In one unverified letter being circulated on social media, a wealth manager at Zhongzhi apologised to his clients, saying the group’s wealth arms have decided to delay payments on all products 

since mid July. 

The incident involves more than 150,000 investors with outstanding investments totalling 230 billion yuan, according to the letter. Zhongzhi was founded in 1995 by Xie Zhikun, who built the firm into a sprawling empire.