The Chinese shadow banking giant whose liquidity crisis has fanned fears about financial contagion is planning to restructure its debt and has hired KPMG to conduct an audit of its balance sheet, people familiar with the matter said.
Zhongzhi Enterprise Group hired KPMG in late July to review its balance sheet amid a worsening liquidity crunch, said the people, asking not to be identified as the matter is private. The Beijing-based company plans to restructure debt and sell assets after the review to repay investors, the people said. The company manages more than 1 trillion yuan (US$137 billion) of assets.
It was not immediately clear how many products Zhongzhi has defaulted on and whether the company has sufficient assets to cover the shortfall if liquidated, said the people, adding that any restructuring process is likely to be lengthy. Zhongzhi has suspended payments on nearly all its products, the people said.
The Chinese firm did not respond to emails asking for comment, while calls to KPMG were not answered.
People protest outside Zhongrong International Trust’s office in Beijing, in this screengrab obtained from a social media video released on Wednesday. Photo: Reuters
Zhongzhi, one of the country’s largest private wealth managers, is the latest financial giant to face the prospect of failure as the fallout from a deepening property slump spreads. Country Garden Holdings, which was previously the nation’s biggest property developer, is on the brink of default after sales plunged and it failed to meet an initial deadline to pay coupons on dollar bonds.
In a sign that Chinese authorities are worried about potential contagion, the banking regulator has set up a task force to examine risks at Zhongzhi. While little known outside China, Zhongzhi is among the biggest players in the country’s US$2.9 trillion trust industry. Many trust products are backed by real estate projects run by troubled developers such as China Evergrande Group.
The concern is Zhongzhi becomes unable to draw sufficient new investment to replace maturing funds, increasing the risk of more missed payments, said Dinny McMahon, an analyst for consultancy Trivium China and author of China’s Great Wall of Debt.
“When investors start to lose faith, then all of a sudden an outfit’s ability to continue to raise new funds becomes more difficult,” McMahon said. “Then the potential for defaults to cascade becomes more and more.”
One Zhongzhi-backed trust company, Zhongrong International Trust, has missed payments on dozens of products and has no immediate plan to make clients whole. Zhongrong has 270 high-yield products totalling 39.5 billion yuan due this year, according to data provider Use Trust.
China’s home prices decline in July as property crisis worsens
The crisis in the shadow banking system is worsening a sell-off in Chinese financial markets, which are already under pressure from disappointing economic data and the slumping property market. While the nation’s top leaders have vowed to boost domestic consumption and support the private sector, they have yet to announce any new stimulus measures. Adding to the stress, Chinese local corporate bond defaults are running at the highest levels since the beginning of the year.
The MSCI China Index fell as much as 2 per cent on Thursday in a fifth day of losses, before erasing declines. The offshore yuan is near a record low against the US dollar.
