Chinese financial giant files for bankruptcy

China's leading asset management company Zhongzhi Enterprise Group has filed for bankruptcy after failing to repay its current debts.

A Beijing court said on January 5 that Zhongzhi filed for bankruptcy on the grounds that it was unable to pay its debts as they came due and that it did not have enough assets to repay all its debts. The court approved Zhongzhi’s bankruptcy application, according to China’s corporate bankruptcy law.

Concerns about the company’s finances began to flare in August 2023, when Zhongrong International Trust, a fund it controls, missed a payment deadline to institutional investors. Zhongzhi Enterprise Group (ZEG) later apologized to investors, saying that since the death of its founder in 2021 and the subsequent resignation of several senior executives, ZEG has struggled with “ineffective” internal governance.

Outside the office of Zhongzhi Enterprise Group in Beijing. Photo: Reuters

Zhongzhi’s business is largely linked to China’s real estate sector, raising concerns that the housing crisis could spill over into China’s $3 trillion shadow banking sector.

Shadow banking, defined as lending outside of banks, is widespread in China. Asset management companies like Zhongzhi are not subject to many of the same regulations as commercial banks. They raise money by selling asset management products to investors, then invest the money in real estate and other sectors.

Experts say investors in these funds tend to be middle class, so defaults, or the fear of defaults arising from missed payments, could dampen consumer confidence. In a letter to investors on November 22, Zhongzhi also said it was “seriously insolvent” with debts of 420 billion to 460 billion yuan ($58 billion to $64 billion).

Police in Beijing, where the company is based, recently launched an investigation into Zhongzhi's suspected illegal activities. Police said they are investigating several individuals associated with the company.

In August 2023, Zhongzhi also revealed that it was facing a liquidity crisis and would restructure its debt. The company said bankruptcy was one of the options it was considering.

Ying Yue, a lawyer at Leaqual, told Reuters that filing for bankruptcy would help them speed up the liquidation process. However, the court process could be slow and investors would likely only receive about 30% of their money, based on previous bankruptcies.

Ha Thu (according to Reuters)

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