Zhongrong Trust Misses Payments, Sparks Fears of Greater Economic Turmoil

A woman walks on a street in front of the Beijing office of Zhongrong International Trust Co., partly owned by Zhongzhi Enterprise Group, in Beijing on Aug. 17, 2023. Greg Baker/AFP via Getty Images

A prominent Chinese financing platform, Zhongrong International Trust Co. (Zhongrong Trust), has reportedly delayed payouts of some of its wealth products since late last month, sparking panic among investors. Some experts believe this is the beginning of a domino-like collapse within the Chinese financial and investment sectors that are symptoms of broader economic woes.

Zhongrong Trust’s missed payment may result in 150,000 high-net-worth investors being plunged into poverty overnight, said an Aug. 16 report from Chinese financial media fengcx.com.

Hundreds of questions from panicked investors have been flooding the communication platform of the Shanghai Stock Exchange and the Shenzhen Stock Exchange, inquiring whether they had bought Zhongrong Trust’s products.

In response, Zhongrong Trust’s chief compliance officer Wang Qiang said on Aug. 14 at a meeting with some investors that Zhongrong Trust has not intended to fulfill its repayment obligations for dozens of matured products, Reuters reported on Aug. 16. The same report said that the firm had skipped repayments on dozens of investment products since late July, a senior official told investors.

Dozens of investors protested outside Zhongrong Trust’s headquarters in Beijing, demanding repayment on Aug. 16, resulting in the authorities deploying a police presence, according to Bloomberg.

The issue affects not just individuals as companies have invested in Zhongrong Trust’s financing products—including leading property developers, such as Everygrande Group, Kaisa Group, Yango Group, Sunac China Holdings, and China Fortune Land. They are expected to suffer huge losses.

Likewise, Zhongrong Trust’s major shareholder, Zhongzhi Enterprises Group (Zhongzhi Group), is facing a potential bankruptcy crisis.

Zhongzhi Group is China’s largest wealth management giant, with a total asset size that once exceeded 1 trillion yuan ($140 billion). It has four associated companies: Hang Tang Wealth, Xinhu Wealth, Da Tang Wealth, and Gao Sheng Wealth, and dozens of private equity funds, forming a vast pool of capital.

A former Da Tang Wealth employee told Chinese financial media Cailian on Aug. 11 that Zhongrong Trust is currently suspending the payment of products on the scale of around 350 billion yuan (about $48.3 billion).

The financing pool’s liquidity crunch has heightened concerns over China’s floundering economy, with the ruling Chinese Communist Party’s top financial supervisor setting up a working group last month to assess Zhongrong Trust’s debts and risks.

Listed Companies

Many of the Zhongrong Trust products held by Chinese listed companies are concentrated to mature in August and September. The market expects that the next few months will be the peak period for listed companies to disclose their payment status with Zhongrong Trust.

A security guard wears a mask when standing in front of the front gate of the Shanghai Stock Exchange Building on Feb. 3, 2020. Yifan Ding/Getty Images

In August, three firms listed on the Shanghai Stock Exchange disclosed that they didn’t receive payment on maturing investment products from Zhongrong Trust.

On Aug. 11, KBC Corporation (688598. SH) said that from Aug. 10 to 12, 2022, it purchased Zhongrong Trust products totaling 60 million yuan (approximately $8.18 million) through Hang Tang Wealth. As of the disclosure date of the announcement, the principal and investment income of the trust product have not yet been recovered, which will have an impact on the company’s profit for the year 2023.

Meanwhile, Nacity Property (603506.SH) also released on Aug. 11 that on Feb. 9, it purchased a 30-million-yuan (about $4.14 million) product from Zhongrong Trust maturing on Aug. 8. However, the company still needs to receive the principal and investment income.

Previously, on Aug. 5, Xian Heng International (605056. SH) said that a wealth product purchased from Zhongrong Trust was overdue. The company invested 20 million yuan (about $2.76 million) on the product; the principal amount of 2.57 million yuan (about $350,000) had yet to be recovered.

Based on the operational status of Zhongrong Trust, other listed companies are also facing payment risks. For example, Weiguan Motor (002801. SZ) has two 50 million (approximately $6.9 million) Zhongrong plans to mature on Aug. 20 and Sept. 11, respectively; Shuangcheng Pharma (002693. SZ) announced that the maturity date of the Zhongrong Trust products amounting to 30 million yuan (approximately $4.14 million) was Oct.17; Minsheng Holdings (000416. SZ) also indicated that it invested in Zhongrong Trust Plan with a sum of 100 million yuan (approximately $14 million), an expected annual rate of return of 6.1 percent, and the term of the investment was one year.

Real Estate Sector

Zhongrong Trust’s annual report showed that as of the end of 2022, the company has assets under trusteeship and management exceeding 629 billion yuan (about $87 billion). Among them, over 67 billion yuan (about $9.29 billion), or approximately 11 percent of trust assets, are invested in real estate.

An aerial view shows the Evergrande Changqing community on Sept. 26, 2021, in Wuhan, Hubei Province, China. Getty Images

“A large-scale payment default of China’s trust sector can be said to be a matter of time,” said Financial Cold Eyes, a YouTube financial commentator on Aug. 11, citing that the vast majority of these trust products are invested in the real estate sector, while large numbers of houses cannot be sold, and real estate firms close down one after one in China.

Therefore, financing trust companies are unable to meet their commitments after suffering the loss from the sluggish real estate sector, said Financial Cold Eyes.

Bank financial products linked to municipal bonds or local government bonds are also a risk for a trust company failing to make payments on time, it added.

Lu Yuanxing, a U.S.-based political and economic analyst who once worked as a marketing executive for a Chinese company, said in an interview with the Chinese Language of The Epoch Times on Aug. 14 that the Zero-COVID restrictions and city lockdowns almost ruined China’s real estate market.

What’s more, many of those real estate companies are highly leveraged, so payment defaults will continue and cause immeasurable losses for companies and individuals who have bought trust products. “There will be a much worse situation for the Chinese economy to come,” Mr. Lu said.

Domino-like Collapse

Given that Zhongrong Trust has a pivotal position in the trust investment industry with considerable influence, problems with this type of company mainly manifest in two ways, “First, it would form a chain reaction, like a domino-like effect,” Mr. Lu said.

He explained that many large companies, including listed companies, have purchased investment products from Zhongrong Trust, saying, “In the event of a payment default, these companies will also suffer investment losses, thus promoting a chain reaction of [other relevant stakeholders].”

A wider knock-on effect would develop as investors lose confidence in the trust financing market. “Investors have started to doubt whether there are still reliable and trustworthy products worth buying and investing in,” Mr. Lu said.

China has very few investment channels, and Chinese spending power has been quite low during the epidemic period, so “if investors stop investing, it will not be favorable to China’s economic recovery.”

“In other words, if investment confidence wanes, a vicious circle will be formed, and the whole economy will shrink further,” said Mr. Lu.