Zhongzhi Group, China’s largest ‘shadow bank’, went bankrupt, financial crisis triggered by real estate in full swing

Zhongzi Group's debt alone is worth 84 trillion won, more than twice its total assets
Concerns about serial bankruptcies in the Chinese trust market worth 2 trillion won
Taeyoung Construction workout, domestic financial community also ‘solve’ crisis theory

Zhongzhi Group, China’s largest private asset management company, has entered bankruptcy proceedings. As Zhongzhi Group’s excess debt approaches 40 trillion won, approximately 15 investors are also expected to suffer significant damage. Concerns that the aftermath of China’s real estate recession could spread to the overall financial sector are engulfing the global economy. 

People’s Court of China accepts Zhongzhi Group’s bankruptcy application

According to a number of local media outlets, including the Daily Economic Daily and Caixin, on the 8th, the First Intermediate People’s Court of Beijing, China, said on the 1th (local time) that “Zhongzhi Group’s assets are far short of its liabilities, and its liabilities are maturing.” “It clearly does not have the ability to repay,” he said, accepting the bankruptcy application filed by the company.

Previously, Zhongzhi Group announced in a letter to investors at the end of last year that it held a total of 4,600 billion yuan (about 84 trillion won) in debt. This happened right after Zhongzhi Group’s asset management division announced in November last year that it had recorded a deficit of $4,000 billion (approximately 11 trillion won). Zhongzhi Group has been under mandatory investigation by Chinese public security authorities since the loss was announced.

Zhongzhi Group recorded the largest bankruptcy in Chinese history. Considering that many Chinese companies that were at risk of default after the 2020 pandemic, such as Hengda Group (Evergrande) and Hainan Airlines (HNA), most of them went through debt restructuring procedures rather than bankruptcy, Zhongzhi Group’s bankruptcy is evaluated as unusual. Currently, Zhongzhi Group’s total assets are 2,000 billion yuan (about 36 trillion won), which is less than half of its total liabilities.

Zhongzhi Group’s crisis originated from liquidity instability in the construction industry that began with the Hengda Group incident in 2021. In the same year, founder She Zhqun died and a large number of key executives left Zhongzhi Group, which was experiencing difficulties in internal management and was unable to find a way to make up for the damage in a market where many real estate development companies declared bankruptcy and left. As a result, the group’s crisis began in earnest in August last year when its asset management subsidiaries, including Zhongrong Trust, stopped paying consumers’ investment profits.

In China, there are concerns that the real estate crisis has spread to the financial sector, including trusts. Unlike banks, the trust market, so-called ‘shadow banking,’ is subject to relatively relaxed regulations, and for this reason, it has been used as the main financial outlet for real estate developers and small and medium-sized businesses who have difficulty obtaining bank loans. The current size of China’s trust market is 2.9 trillion (approximately 3,815 trillion won), which exceeds France’s gross domestic product (GDP) of 2.7829 trillion (approximately 3,661 trillion won as of 2022).

As a result, the prevailing opinion in China is that it will be impossible to avoid serial damage as Zhongzhi Group’s investors are diverse, including individuals, companies, and institutions. However, the Chinese authorities are showing a strong commitment to financial stability, saying, “We will strongly intervene in the market when problems arise.” The People’s Bank of China, China’s central bank, provided liquidity support of 12 billion yuan (about 3,500 trillion won) in December last year for the purpose of boosting the country’s real estate economy.

The Korean financial world is also on thin ice, and financial authorities say, “Liquidity supply measures are sufficient”

A financial crisis caused by real estate is also raising its head in Korea. This is because Taeyoung Construction, a mid-sized construction company ranked 16th in the construction ability evaluation, applied for corporate improvement work (workout) on the 28th of last month, and the insolvency of real estate project financing (PF), which had been quiet, came to the surface. According to Korea Credit Rating, Taeyoung Construction’s PF guaranteed debt, which matures within a total of 12 year and 12 month from December of last year to December of this year, amounts to KRW 1 trillion.

This PF crisis can spread to the entire financial sector at any time. According to the financial authorities, the balance of PF loans for domestic construction companies as of August last year was KRW 8 trillion, of which KRW 134 trillion corresponds to contingent liabilities. PF contingent liabilities increased by about 3,000% compared to the same month of the previous year, and the delinquency rate also jumped to 22%, more than twice the rate in December 8,000 (29%).

Financial authorities expressed confidence in overcoming the crisis, saying, “We have prepared sufficient measures for orderly corporate restructuring and liquidity supply.” Regarding Taeyoung Construction’s workout, he said, “We will closely monitor the market and quickly implement situation-specific measures, such as expanding the market stabilization measures currently operating at the level of KRW 85 trillion.” “We plan to operate a daily inspection system for related agencies to quickly resolve difficulties and closely manage the construction status and financing status of each business site,” he said.