Is China’s Lehman moment coming? What you need to know
A large Chinese investment trust has failed to make payments to corporate investors, resulting in a rare protest and raising fears that a fall in China’s property market would cause a wider financial crisis.
In separate stock exchange filings in recent weeks, at least three Chinese companies — Nacity Property Service, KBC Corporation, and Xianheng International Science and Technology — stated that Zhongrong Trust had failed to pay the interest and principle on multiple investment products. According to their comments, the total amount of payments skipped topped 110 million yuan ($15 million).
Zhongrong Trust, which managed $87 billion in funds for corporate clients and rich people as of the end of 2022, is one of thousands of wealth management organisations in China that provide investors with relatively high rates of return.
They are classified as part of the “shadow banking” industry, which is a major source of funding in China. Financing activity that occurs outside of the formal banking system, either by banks through off-balance-sheet activities or by non-bank financial entities such as trust firms, is commonly referred to as shadow banking.
The “shadow banking” sector, a hidden and massive portion of China’s financial landscape, has come under scrutiny as global investors fret about the world’s second largest economy’s future.
Concerns over Zhongrong have escalated this week as a result of social media images depicting a protest outside its Beijing office.
According to recordings seen by CNN on the social media apps Douyin and WeChat, a dozen irate demonstrators were videotaped screaming slogans and demanding payment for investment items supplied by the company. The videos appeared to be published on Wednesday and Thursday.
Zhongrong published a statement on Monday, claiming that “criminals” had sent bogus warnings to customers about the termination of investment packages. It has cautioned investors to be wary of fraud, but has not commented on the matter of investor delayed payments.
Zhongrong is a subsidiary of the Zhongzhi Group, one of China’s largest private conglomerates with interests in finance, mining, and electric vehicles. According to a December statement posted on the group’s website, the key financial operations manage more than one trillion yuan ($138 billion) in funds.
The news of Zhongrong’s delayed payments sparked concern on social media, as it appeared to validate earlier this year’s online speculation that Zhongzhi Group had encountered a liquidity crisis and ceased repayment on some of its numerous investment products.
In recent days, investors have flocked to the Shanghai and Shenzhen stock exchanges’ online forums, asking various listed companies whether they had any exposure to Zhongrong’s products.
Citi analysts noted in a Wednesday research paper that investors were concerned about “contagion” spreading through the country’s $2.9 trillion investment trust business. This is because the business has long been vulnerable to China’s struggling real estate sector, which is currently experiencing its worst recession in history.
However, “systemic risks” were minimal, according to the analysts, and prospective trust defaults were unlikely to trigger China’s “Lehman moment,” a reference to the bank’s 2008 collapse, which represented a significant worsening of the global financial crisis.
According to the China Trustee Association, by the end of March, the entire exposure of all trust funds to the property sector was estimated to be 1.13 trillion yuan ($154 billion), accounting for approximately 5% of the overall value of trust funds in the country.
“It is fair to say that given the latest developments related to Zhongzhi, its subsidiaries, and other wealth management firms, this 1.13 trillion yuan in funds… is now under great threat,” Nomura analysts wrote in a research report published on Monday.