China’s real estate trouble seems to spill over to its shadow banking industry. According to a Bloomberg report, Zhongzhi Enterprise Group Co, a Chinese state owned (央企) financial conglomerate that manages about 1 trillion yuan ($138 billion) missed payments on financial products that are issued by one of its subsidiaries. The problem was made known after several of its public company clients disclosed the potential losses from the non-payments in the regulatory filings. One of the public companies, Nacity Property Service, purchased 30 million RMB of money market trust (I suppose it’s similar to a CD?!) in February 2023 from Zhongrong International Trust, a subsidiary of Zhongzhi Enterprise Group. The trust supposedly matured August 8th 2023 but the company didn’t get their money back and didn’t know if they will receive their principal and interest back. It is also alleged some clients of Zhongrong Trust have been notified that they could no longer make redemptions.
This is kinda insane!! First, Zhongzhi is not some random company. It’s a state-owned company that was directly managed by China’s central government(央企). Imagine you put your money into money market funds managed by Fidelity or Vanguard and they tell you that you can’t get your money back. Second, their $138B AUM is significant and if the company collapses, there will be a domino effect. Many high net worth individual and corporate clients will lose a significant portion of their liquidity. If they don’t have cash to pay their bills, their counter parties will have liquidity issues and their counter parties’ counter parties will also have liquidity issues, etc. Third, this piece of news will surely trigger some further panic that results in a bank run kind of situation. The company must be in some deep distress to decide not to honor the redemptions.
China is not a free capitalistic society so the whole thing is not widely talked about like the SVB collapse, at least not on the public internet behind the Chinese Great Wall. But this surely looks like an SVB or worse situation. It will be interesting to see if there will be some kinda government bailout. Anyhow, this is obviously another blow to the already fragile Chinese economy and I will be watching the Chinese situation closely as what happens there will have impact around the globe.