Zhongzhi Enterprise Group Co., long one of China’s most prominent non-state-run or “shadow” banks, is the latest casualty of a market where reliable reporting of financial data is hard to come by.
The government continually overestimates the speed of growth, the level of market diversification, and the robustness of property values that have been in decline for months.
An unrealistic view of the strength of an economy under the oversight of Chinese Communist Party (CCP) bureaucrats has led to one of the worst blow-ups in the history of business in China, and more such disasters are all but certain to follow under current policies.
That’s the view of Charles Trczinka, a professor at Indiana University’s Kelly School of Business, who has lived and worked in China and has given talks to executives there.
The failure to diversify, and the lack of accurate reporting, are evident not only in the real estate sector but throughout China’s corporate landscape, whether the companies in question are state-owned, or, as in the case of Zhongzhi, relatively unregulated shadow entities, Mr. Trczinka believes.
The First Intermediate People’s Court of Beijing is overseeing insolvency proceedings as the firm and regulators wonder how to begin to resolve the mess and repay creditors.
“At one point, Zhongzhi’s assets were twice the value of its liabilities, and now they’re half. The Chinese economy slowed in 2023 and it may very well slow again in 2024, and right now, people are calling it a drag on the world economy,” Mr. Trczinka told The Epoch Times.
While many people associate a large economy with dynamism and abundant opportunity, Mr. Trczinka suspects that Chinese Communist Party (CCP) representations of the health and strength of the local market may have spread misleading impressions.
“In my view, China is not a country where you can really trust government disclosures. I think [Zhongzhi’s collapse] is a symptom of an economy that we don’t actually know the size of, we can’t trust the data,” he said.
Though China’s economy depends heavily on credit-based real estate transactions, Mr. Trczinka said it is all too easy to underestimate the dangers of a conglomerate such as Zhongzhi to take on too much debt and become overleveraged.
“The troubled real estate sector is a big sector. It has all kinds of stuff in it, but they’re not as well diversified as they thought,” Mr. Trczinka said.
Mr. Trczinka expanded on his point by comparing the fate of Zhongzhi and the downturn in China’s markets to one of the most turbulent periods in the history of finance—the global meltdown of 2008 to 2009.
“It’s sort of like what happened on a bigger scale in the financial crisis of 2008, where people thought that in far-flung markets like Wyoming, Atlanta, and Boston, you wouldn’t have to worry about property values falling, but they all fell at once,” Mr. Trczinka said.
Mr. Trczinka sees a similar phenomenon afflicting a shadow bank making loans where tumbling housing prices undermined its business model.
“China appears to be experiencing the same thing. The advantage that I’m sure Zhongzhi had [counted on] was diversification,“ Mr. Trczinka said. ”China’s a big country and there are a lot of different markets they could invest in, but they probably didn’t expect them all to fall at once.
“Chinese markets were overvalued, and now they’re falling. As soon as you get falling prices, leverage matters a lot, and they had to file for bankruptcy,” he added.
Officials in Beijing might have seen which way the wind was blowing, experts say. The fate of Zhongzhi did not come out of the blue. It followed a number of high-profile unravelings of other firms active in real estate.
Mistrust of the Private Sector
Experts who have followed Evergrande’s slow demise attribute its woes partly to the firm’s diffuse character as a real estate conglomerate that expanded without rhyme or reason into other specialized areas as varied as artificial intelligence, electric vehicles, cosmetics, and mineral water.But CCP mismanagement, and the reckless accumulation of debt, also helped turned the company into a drastically overleveraged, unwieldy behemoth that could not begin to meet its debts, they say.
“It’s a difficult balancing act, and it is hard to predict how this will end for Evergrande’s assets,” Dylan Sutherland, a professor at Durham University Business School, told The Epoch Times.
Mr. Sutherland said he expected CCP officials to intervene to try to salvage financial stability, as well as send a message to other players in the market that the CCP has ultimate authority in the supposedly hybrid economy.
In the Chinese market, “shadow” firms such as Zhongzhi often have an ambiguous status. Mr. Trczinka sees deep cultural issues, including a continuing distrust of private initiative, as an ongoing difficulty for firms that try to carve out an identity independent of CCP rule.
He recalled an experience in the 1980s when he was delivering addresses to executives in China under the auspices of a Commerce Department program.
“I remember giving a talk to Chinese executives of state-owned enterprises. I said, ‘Trust the market,’ and I got all this pushback about, ‘Well, sure, it might be better for the economy but we’re going to have problems socially.’ You could see the tension,” Mr. Trczinka said.
“There have been more situations like this. It’s a case of China not trusting its own people. There is a high level of corruption, too,” he added.
While China’s real estate market continues to experience severe turbulence, experts do not expect Beijing to encourage innovation in areas that might offer citizens new avenues for seeking prosperity and independence.
However, the government agency took the article down shortly after its publication.
For the foreseeable future, China’s government appears set to maintain its anti-crypto stance and to contribute further to the stigmatization that industry analysts call one of the biggest hurdles to the mainstream adoption of digital assets.
“There are two main barriers, as far as I’m concerned: global regulation and the fact that most people still find it difficult to understand and operate,” Denis Rogachev, CEO of Cryptadium, a Vilnius, Lithuania-based cryptocurrency payment platform, told The Epoch Times.
“Global regulation means that the interests of regulators are in direct opposition to the philosophy of cryptocurrencies. Regulators want to see and control everything.
“So Bitcoin should [trade through] mobile apps similar to banks. But the philosophy of cryptocurrencies is to remain anonymous and actually own your money,” he added.
As long as the Chinese government maintains its current stance, mainstream adoption is unlikely.
“For adoption for everyday use, we need user-friendly apps and processes. People need to see that it’s not that much different from how fiat money works, but faster, cheaper, more secure,” he said.
