SHANGHAI/BEIJING/HONG KONG (Reuters) – Zhongzhi Enterprise Group, the former leader of China’s shadow banking sector, which declared bankruptcy last year, used aggressive and potentially illegal sales practices to prop up its bankrupt operations, according to an analysis of records. Reuters and eight people with direct knowledge of the matter.
China’s years-long property boom has catapulted Beijing-based Zhongzhi to the top of the country’s $18 trillion asset management industry, making it a major player in a shadow banking sector the size of the French economy. Asset managers like Zhongzhi sell wealth management products to investors. The proceeds are then channeled by licensed trust firms, such as its Zhongrong unit, to developers and other companies unable to access direct bank financing due to poor credit or other reasons.
Previously undisclosed details show that for about a year before the financial problems emerged, Zhongzhi units were paying returns to existing investors in wealth management products using funds from new investors and promising lucrative returns to individual investors. deepening property crisis.
China’s trust firms are known as shadow banks because they operate outside many of the rules governing commercial lenders. But in 2018, China’s top banking regulator ruled that financial institutions, including shadow banks and asset managers, should not create capital pools, preventing them from using money from new sales to pay for returns on existing wealth management products, and restricting the proceeds from wealth management. they should not guarantee. -management products.
After two lawyers reviewed Reuters’ findings at the news agency’s request, Zhongzhi appears to have violated both requirements. Lawyers added that such violations could result in fines and up to 10 years in prison.
“The basis of his suspected illegal act is to raise money from investors through licensed financial institutions to finance the group’s business operations and expansion,” said Zhang Guanghui, a lawyer at Guangdong Suijia Law Firm.
Zhongzhi and its divisions identified in this story did not respond to requests for detailed comment on the practices reported by Reuters.
Chinese officials spoke the same way. China’s public security and justice ministries, which oversee Beijing police and prosecutors, did not respond to inquiries about the cases against individuals linked to the shadow bank. China’s National Financial Regulatory Authority and central bank also did not respond to requests for comment on the practices of Zhongzhi units.
The liquidity crisis at Zhongzhi became public when its Zhongrong trust unit missed payments on dozens of products in the third quarter of 2023, fueling investor protests and worries that China’s property collapse could spill over into China’s $66 trillion financial industry.
Ultimately, Zhongzhi told investors in November 2023 that it was insolvent with liabilities of up to $64 billion. The group filed for bankruptcy in January, while Beijing police investigated its business practices. In March, Beijing police said on WeChat that Zhongzhi’s wealth management companies must cooperate with police and return any illegal proceeds.
In August, Beijing prosecutors said they had charged 49 suspects linked to Zhongzhi on suspicion of misappropriating public funds, without giving details.
State deposits fed into Zhongzhi’s shadow banking operation through funds that investors placed in wealth management products sold by Zhongzhi’s licensed financial units. Reuters could not identify the specific deposits or units referred to by prosecutors.
Interviews with current and former employees and investors at Zhongzhi Group, as well as records reviewed by Reuters, shed new light on how the illegal practices of its units exposed middle-class savers to the damaging consequences of China’s property collapse, despite efforts by regulators to rein it in. the excesses of the shadow banking sector.
Eight sources spoke to Reuters on condition of anonymity, citing fear of official retaliation.
CLOSE TO SHOPPING
Zhongzhi was founded in 1995 by Xie Zhikun, a rags-to-riches tycoon who started with timber and real estate businesses before expanding into financial services.
In its heyday, Zhongzhi cashed in on China’s booming property market. According to four Zhongrong investment banking documents from 2017 reviewed by Reuters, the Zhongrong trust arm raised funds by selling wealth products to retail investors while charging more than 12% interest on one-year loans from developers such as Country Garden. While this is not unusual for shadow banks, the benchmark bank lending rate was around 4%.
As business took off, Xie rubbed shoulders with developer tycoons, including from China Evergrande (HK 🙂 Group head Hui Ka Yan and Country Garden head Yang Guoqiang, according to three current and former staff members. Both developers have since defaulted on debt repayments and property construction; Evergrande is going through a court-ordered liquidation process, and Country Garden is facing a prospect. Neither responded to requests for comment about their relationship with Zhongzhi.
Zhongzhi employees have reaped high rewards as the property boom boosted both growth and demand for high-yield wealth products, said one current and two former Zhongrong employees. Xie gave large sums to his alma mater, Fudan University, and organized summer vacations where he would recite poetry for top-performing employees, two of the people said. The university did not respond to questions about unspecified donations.
Meanwhile, sales staff at the Zhongzhi units have criticized the group’s ties to local governments and state-owned Jingwei Textile Machinery Co., the trust unit’s largest shareholder, according to two investors and now-deleted state media reports. they welcomed their support. Jingwei did not respond to a request for comment on the nature of her relationship with Zhongzhi.
Xie died in 2021 at the age of 61 after suffering a heart attack. That year also marked the beginning of the property sector’s liquidity crisis as Chinese regulators clamped down on debt-laden construction by developers to curb the risk of contagion to the wider financial sector.
In July of that year, a sales pitch for a Zhongzhi division’s wealth management product masked the growing tension.
“This is a fixed-income product,” a Hang Tang Wealth seller wrote to investors on the WeChat group in July 2022, according to a screenshot of the exchange reviewed by Reuters. The seller guaranteed a minimum three-month wealth management product return of 6.2% on investments above 1 million yuan, or about $140,000, which exceeds 1.5% on local bank deposits.
The Zhongzhi division “undertakes a full, unconditional and irrevocable commitment” to timely payments to investors, the seller said, giving a three-thumbs-up emoji.
The tactics and claims of Zhongzhi sellers attracted thousands of investors. But developers across the country have defaulted on loans owed to Zhongrong, a licensed unit trust, as they begin to suffer from cash flow problems. In turn, Zhongrong defaulted on amounts owed to investors.
As difficulties mounted, Zhongrong board secretary Wang Qiang briefed dozens of angry investors at the company’s Beijing headquarters in August 2023. Wang told them that funds from Zhongrong’s wealth management products were invested in projects that were no longer profitable, and the company eventually struggled to meet repayments, according to a transcript of the meeting reviewed by Reuters, as well as four current and former Zhongzhi employees and two investors.
“There should have been no returns from the products,” Wang said. “With no revenue, what can we use to pay back investors? Either release new products or rely on the remaining cash.” But on July 28 that year, the cash ran out, he added.
Pressed by the investor on whether Zhongrong was engaged in capital pool business, which is prohibited by regulations, Wang admitted: “Some products have features of capital pool.”
Zhongzhi increasingly used such practices starting in early 2022 as developers defaulted on loans and its coffers dried up, said one current and three former Zhongzhi unit employees. The result, they said, was to hide Zhongzhi’s deteriorating condition.
Wang Zhongrong could not be reached for comment.
AFTER FALL
Zhongzhi’s collapse resulted in massive lending to cash-starved developers, many of whom turned to shadow banks for loans, as Beijing’s crackdown cut them off from high-street lenders, according to three current and former employees.
Zhongrong’s real estate investment exposure accounted for 10.7% of its total assets under management by the end of 2022, higher than the industry average of 5.8%, according to Citigroup. Zhongrong provided roughly the same figure in its annual 2022 financial report.
Most likely, the bankruptcy procedure will take a long time. On June 28, a Beijing court said Zhongzhi’s bankruptcy administrator had filed for “substantial consolidation” and liquidation of the company and 247 affiliated firms. An administrator at the Beijing Dacheng Law Office did not respond to questions from Reuters about the process.
Some Zhongzhi investors told Reuters they had lost hope of getting their money back.
Wang, 51, who owns a technology company in Shenzhen, thought he was “playing it safe” when he invested 1 million yuan in his Zhongzhi division’s four-year-old product, Zhonghai Shengrong.
In the May 2020 investment agreement reviewed by Reuters, Wang said the expected rate of return was 11%, compared with the three-year bank deposit rate of 2.75%. The document stated that the funds collected from the product went to the “working capital” of the unit.
But a few months before Wang’s due date, Zhongzhi declared bankruptcy.
“It turned out that I was under a landslide.
($1 = 7.0850 renminbi)
