Shadow bank Zhongzhi files for bankruptcy as China’s debt and property crisis deepens

Zhongzhi Enterprise Group filed for bankruptcy liquidation late Friday, as the Chinese shadow banking conglomerate is unable to repay its debt amid a deepening actual property crisis within the nation.

The firm has filed for bankruptcy on the grounds that it’s “clearly” missing the flexibility to repay debt and has inadequate belongings to repay its dues, in line with a WeChat statement issued by Beijing’s First Intermediate People’s Court.

Shadow banks in China function by pooling family and company financial savings to supply loans to put money into actual property, shares, bonds, and commodities. Companies such as Zhongzhi have usually financed many massive Chinese property builders.

Zhongzhi had warned about its distressed monetary state of affairs as far again as August when Reuters reported that the company had told investors it was going through a liquidity crisis.

It then declared insolvency in a letter to its buyers in November, shortly after which Beijing police commenced an investigation into the debt-laded shadow bank.

“While the firm’s creditors are mostly wealthy individuals rather than financial institutions, its collapse could nevertheless hurt general market confidence. It could also renew concerns over the trust industry and whether it would have broader and significant implications for the ailing real estate industry,” analysts at Commerzbank wrote in a consumer observe.

The broader CSI 300 index fell 1.2% by early afternoon buying and selling, weighed down by property shares.

Hong Kong listed shares of property companies together with Logan Group, China Vanke, Sunac and Longfor Group dropped between 2% and 3.6%.

China’s authorities has in the previous couple of years tried to limit the rapid growth of non-bank debt issued by shadow banks.

The largest banks in China are state-owned, making it more durable for non-state-owned companies to faucet conventional banks for financing, which had helped spur an increase in shadow banking.

The nation’s large property sector has additionally been caught in the midst of a crackdown on shadow banking which was utilized by actual property firms to buy land from native governments.

“We do not expect a government bailout as many Zhongzhi products are non-standard wealth management products that had long been discouraged or banned by Chinese regulators; some are comparable to a Ponzi scheme,” Zerlina Zeng, senior credit score analyst at CreditSights advised CNBC’s Squawk Box Asia.

“We will likely see more trust loan defaults as their underlying investment are local government financing vehicles and real estate debt … local governments will likely continue to prioritize public debt at the cost of trust loans,” Zeng warned.

China’s property market has been suffering from a debt crisis since 2020, with actual property giants such as Evergrande and Country Garden struggling to repay dues. Their cash flows have dried up, largely because of falling house gross sales.

Home gross sales development and prices have remained sluggish, however Beijing kicked off a broader deleveraging of the once-bloated real estate sector — which accounts instantly and not directly for about one third of China’s financial exercise.

— Clemet Tan & Evelyn Cheng contributed to this story.