Zhongzhi Enterprise Group, a Chinese shadow bank with deep ties to the country's property sector, filed for bankruptcy Friday. The group no longer has the means to pay off its debts, according to a statement from Beijing's First Intermediate People's Court, which accepted the shadow bank's bankruptcy application.
Zhongzhi has looked shaky since late November. In a letter to investors, the company calculated its total liabilities at around 420 billion to 460 billion yuan, or around $59 billion to $65 billion, and its tangible assets at just 200 billion yuan ($28.2 billion), meaning the bank had a shortfall of around $36.4 billion.
Yet issues were emerging as early as August, when one of the bank's affiliated companies missed payments on several high-yield investments. Chinese authorities also opened criminal investigations against Zhongzhi just days after the firm warned of its shortfall in late November.
Chinese authorities decided in October that bankruptcy would be the most effective approach to limit the effect of Zhongzhi's struggles on financial markets, reports Bloomberg citing anonymous sources.
China's shadow banks tend to work outside of the rules that govern the country's traditional banks. These organizations work with wealthier customers, and facilitate the movement of funds from investors to industries like property, commodities, and other sectors of the economy. These shadow banking institutions often offer higher yields than China's large state-owned banks. China's shadow banking industry is estimated to be worth around $3 trillion and Beijing has been trying to clamp down on the sector.
At its peak, Zhongzhi controlled assets of more than 1 trillion yuan, or $141 billion. But in its November letter, the firm admitted that the death of its founder Xie Zhikun in 2021 and the subsequent departure of senior executives had led to issues with the company’s internal management.
Zhongzhi is the latest casualty from China's long-running property crisis. Developers like China Evergrande Group and Country Garden Holdings borrowed heavily to fuel a wave of construction across China. But rules from Beijing to rein in borrowing ended up sparking a liquidity crisis and a wave of defaults across the real estate sector. That, in turn, dragged down China's property values, deepening the crisis.
Throughout the crisis, Zhongzhi through its affiliates offered loans to troubled developers and bought assets from companies like Evergrande, according to Bloomberg.
The property sector, which some estimates say accounts for as much as a third of China's economy, is still dealing with its slump. Home sales during the New Year holiday period this year were also weak, falling 26% year-on-year, according to a Reuters report citing a China Index Academy survey of 40 cities. Beijing has tried various ways to revive demand such as cutting down payment requirements and signaling support to ease developers’ funding woes.
The country’s embattled property giant Evergrande, which is also the world’s most indebted property developer, faces a liquidation hearing in a Hong Kong court on Jan. 29.
