The Beijing-based Zhongzhi Enterprise Group, known alternatively as Zhongzhi Capital, is a Chinese shadow banking conglomerate that filed for bankruptcy on Jan. 5. Shadow banks like Zhongzhi Capital operate by pooling household and corporate savings to offer loans for investments into real estate, stocks, bonds and commodities.
Zhongzhi had been warning about its distressed financial situation as far back as August, when reports came out that the company had told its investors that it was facing a liquidity crisis. The company then declared insolvency in a letter to its investors in November, shortly after which law enforcement in Beijing commenced an investigation into the shadow back.
"While the firm's creditors are mostly wealthy individuals rather than financial institutions, its collapse could nevertheless hurt general market confidence," analysts at German universal bank Commerzbank wrote in a client note. "It could also renew concerns over the trust industry and whether it would have broader and significant implications for the ailing real estate industry."
In one of Zhongzhi's last letters to investors before declaring itself insolvent, the company noted that it has up to $64 billion in liabilities.
China's highly indebted property sector has been reeling from a liquidity crunch since at least 2020. Notable developers have been defaulting on their debts since late 2021, impeding the country's economic growth and having a clear reverberations in global markets. (Related: Evergrande Group files for bankruptcy in the U.S. after two years of distress… debt defaults will now spread across America.)
Zhongzhi's bankruptcy declaration stems from its claim that it can't pay its due debts and that even if it sold off all of its assets, their value is insufficient to pay all of its debts. A bankruptcy court in Beijing accepted Zhongzhi's bankruptcy liquidation application on Jan. 5, in accordance with Chinese enterprise bankruptcy law.
The Chinese shadow banking industry is worth approximately $3 trillion, roughly the size of the entire economy of France. The worsening woes of Zhongzhi, a major player in this sector, adds to worries that the country's property debt crisis is spilling over to other parts of the broader financial sector.
Chinese wealth managers working for the shadow banking sector typically operate outside many of the Chinese Communist Party's rules governing commercial banks. This allows them to funnel the proceeds of the wealth products they sell to retail investors to real estate developers and other sectors.
China understands the dangers associated with letting the shadow banking sector remain as it stands, which is why in the last few years it has tried to limit the rapid growth of non-bank debt issued by shadow banks.
But the problem here is that many of the largest banks in China are owned by the state, making it difficult for non-state-owned businesses to reach out to these traditional, government-backed banks for financing. Without proper avenues for these businesses to receive loans, they have to turn to shadow banking.
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Watch the video below about furious investors protesting outside China's insolvent shadow banking giant after it misses payments.
This video is from the MEGA (Make Earth Great Again) channel on Brighteon.com.