Just a week ago, Zhongzhi Enterprise Group Co. attracted little notice within China and was almost unheard of elsewhere.
Now, the secretive shadow banking giant has become the latest symbol of financial fragility in an $18 trillion economy where the confidence of investors, businesses and consumers is rapidly eroding.
The private manager of more than 1 trillion yuan ($137 billion) and the company’s trust affiliates are under intense scrutiny after it stopped payments to thousands of customers. Underscoring its importance, regulators have formed a task force as they seek to curb the spread. Behind the scenes the company has hired KPMG to implement what is likely to be a lengthy restructuring process. Potential asset sales threaten to weigh on broader markets.
Zhongzhi’s troubles also sparked protests, prompting police across the country to order disgruntled clients not to go public in their desperation to recoup losses. Chinese assets tumbled as word of Zhongzhi’s troubles spread, helping push the yuan to near 16-year lows. The central bank’s rate cut this week did little to bolster confidence as concerns grew about multiple failures in the country’s $2.9 trillion trust sector.
The unrest represents yet another challenge for Xi Jinping’s government, which is already grappling with a weak economy, an asset selloff and growing geopolitical tensions with the US. It’s also a reminder of the potential for unwelcome surprises in an opaque Chinese financial system that has long been dogged by concerns about unsustainable debt.
“It’s a problem that’s only going to get worse” with more funds missing payments, Kathy Lien, managing director of BK Asset Management, said in an interview Thursday with BNN Bloomberg Television. “There’s only so much they can do,” he said, referring to Chinese authorities, calling it a “crisis of confidence.”
For Zhongzhi, the pieces fell apart quickly. The first public sign of trouble came with three stock exchange filings by corporate clients in Shanghai late Friday. The filings sounded the alarm about unpaid payments on high-yield investment products offered by the company and Zhongrong International Trust, a trust company closely linked to Zhongzhi.
Zhongrong is a top-10 trust, pooling deposits from mostly wealthy individual investors and companies to invest in stocks, bonds and other assets, while lending to companies that can’t- access to traditional banks. Although they operate in the shadows, the trusts account for nearly 10% of China’s total loans, according to Bloomberg Economics.
Zhongrong has 270 products worth 39.5 billion yuan due this year, according to data provider Use Trust.
To attract money, trusts like Zhongrong offer rates of up to 6% or 8% for a one-year term, about double what commercial banks pay for similar products. With Chinese stocks collapsing and real estate in a two-year decline, these seemingly forgettable funds with quarterly payouts have attracted trillions of yuan.
The pitch worked for Joey, a client in northern China who invested about 2 million yuan — more than a quarter million dollars — in four Zhongrong products that earned 4% to 6%. Many neighbors have also invested. He is now wondering if he will get any money back after the payments stopped in June. Visits to the local regulator and police were fruitless.
“We’re so desperate,” said Joey, who declined to give his full name due to privacy concerns. “We may have no choice but to take to the streets sooner or later.”
Zhongzhi was founded as a timber business in 1995 by Xie Zhikun, who before his death in 2021 made a fortune in printing before expanding into distressed assets including real estate.
Before Zhongzhi’s troubles surfaced in the open, they were already operating behind the scenes. In late July it hired KPMG to review its balance sheet amid a worsening liquidity crisis, people familiar with the matter said, asking not to be identified because the matter is private. The Beijing-based company plans to restructure debt and sell assets after the review to repay investors, the people said.
It is unclear how many products Zhongzhi has defaulted on and whether the company has enough assets to cover the shortfall in the event of liquidation.
In recent years, even as rival trusts have removed risks, Zhongzhi and its affiliates, particularly Zhongrong, have extended financing to troubled developers and acquired assets from companies. including China Evergrande Group.
Real estate investments plummeted after a crackdown on property lending and a drop in sales during the pandemic led to a surge in defaults. Even developers like Country Garden Holdings Co. which survived the first wave of failures under pressure as the slowdown continued. Home sales in China fell by the most in a year last month, and Country Garden is on the verge of defaulting after it defaulted on a coupon.
The property problems have created a cash crunch for trusts like Zhongrong, which rely on investments and loans to repay depositors. An estimated 10% of all trust assets – about $300 billion – are tied to the property sector, according to Bloomberg Economics.
Trouble in the trust sector is nothing new, but Zhongzhi’s size has added to the concerns. About 106 trust products worth 44 billion yuan have defaulted this year as of July 31, according to Use Trust. Real estate investments accounted for 74% of defaults in value. Last year also saw billions of dollars in defaults.
“Defaults could continue to hurt investor and market sentiment,” Fitch CreditSights analysts Zerlina Zeng and Karen Wu said in a note. “The bad end of any large trust or wealth management company can test its near financial stability.”
As payment delays increased this week, so did the protests.
About two dozen people rallied outside the company’s offices in Beijing, in a rare display of public anger in the capital. In one of the video clips posted on Wechat seen by Bloomberg News, a woman is heard shouting: “Give us back the money, or we will die here.”
In an effort to quell the social unrest, Chinese police responded quickly, placing metal gates around the office. They also visited the homes of many protesters, urging them to avoid public demonstrations, according to the investors who asked not to be identified. The police visits covered a large area, including the southwestern province of Sichuan, and the coasts of Jiangsu and Shandong.
The failures drew attention from Beijing. The National Financial Regulatory Administration, China’s top banking regulator, has set up a working group to examine the financial holding company’s risks, according to people familiar with the matter. The regulator required Zhongrong to report its plans for future payments and assets it could sell to address the liquidity crunch, the people said.

Although Zhongzhi’s misfortune is unlikely to affect the big commercial banks, it could spread to other asset managers if wealthy investors start pulling their money, said Dinny McMahon, an analyst at Trivium China and author of China’s Great Wall of Debt.
“If investors start to lose faith, then suddenly an outfit’s ability to continue to raise new funds becomes very difficult,” McMahon said. “Then the potential for cascading defaults becomes even greater.”
–With help from Zhang Dingmin.
Top picture: The headquarters of Zhongzhi Enterprise Group Co. in Beijing, China, on Tuesday, August 15, 2023. China’s banking regulator has set up a taskforce to examine the risks of Zhongzhi, one of the country’s leading private wealth managers, after which the unit Zhongrong International Trust Co. could not afford many high-yield investment products. Photo credit: Bloomberg
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