SHANGHAI/BEIJING/HONG KONG, Sept 11 (Askume) – Zhongzhi Enterprise Group, the former leader of China’s shadow banking industry, declared bankruptcy last year .
China’s years-long real estate boom has catapulted Beijing-based Zhongzhi Group to the top of the country’s $18 trillion asset management industry and made it a major player in a shadow banking sector the size of France’s economy. Asset management companies like Zhongzhi sell wealth management products to investors. These proceeds will then be routed by licensed trust companies like Zhongrong to developers and other companies that cannot access bank funds directly because of poor credit or other reasons.
Previously unreported details show that about a year before its financial problems became public, Zhongzhi’s subsidiaries used money from new investors to pay returns to existing investors in wealth management products and promised generous returns to individual investors, but this is inconsistent with the group’s risk taking.
China’s trust companies are known as shadow banks because they operate outside many of the regulations of commercial lenders. But China’s top banking regulator made it clear in 2018 that financial institutions, including shadow banks and asset management companies, are not allowed to set up capital pools to prevent them from using money from new sales to cover returns on existing wealth management products, nor are they allowed to guarantee wealth returns – management products.
Two lawyers who reviewed the Askume findings at Askume’ request said Zhongzhi appeared to have violated both requirements. Such misconduct is punishable by a fine and up to 10 years in prison, the lawyers said.
“The core of its suspected illegal conduct is raising funds from investors through its 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 subsidiaries mentioned in this article did not respond to detailed requests from Askume for comment on these practices.
Chinese officials have been equally tight-lipped. China’s Ministry of Public Security and Ministry of Justice, which oversee Beijing’s police and prosecutors, respectively, did not respond to inquiries about cases involving people involved in shadow banking. China’s State Financial Supervision Bureau and the People’s Bank of China also did not respond to requests for comment on Zhongzhi’s practices.
Zhongzhi’s liquidity crisis became public in the third quarter of 2023 when the trust’s subsidiary Zhongrong failed to pay payments for dozens of products, sparking investor protests and fears that China’s real estate crisis is spreading to the $66 trillion financial industry.
Eventually, Zhongzhi told investors in November 2023 that the company was bankrupt, with liabilities of up to $64 billion. The group applied for bankruptcy liquidation in January while Beijing police investigated its business practices. In March this year, Beijing police said on WeChat that Zhongzhi’s financial management companies should cooperate with the police and return illegal profits.
In August, the Beijing Procuratorate said it had charged 49 suspects linked to Zhongzhi on suspicion of illegally embezzling public deposits, but did not give details.
Public deposits flow into Zhongzhi’s shadow banking business through money invested by investors in wealth management products sold by Zhongzhi’s licensed financial institutions. Askume was unable to identify the specific deposit or entity that prosecutors were referring to.
Interviews with current and former Zhongzhi employees and investors, as well as records reviewed by Askume, provide a clear picture of how Zhongzhi’s potentially illegal behavior exposed middle-class savers to devastating consequences despite China’s efforts to curb the real estate bubble.
Eight sources spoke on condition of anonymity for fear of official retaliation.
Starting from zero
Zhongzhi was founded in 1995 by self-made tycoon Xie Zhikun, who started with the timber and real estate business and later expanded into financial services.
In its heyday, Zhongzhi profited from China’s booming real estate market. Four Zhongrong Investment Bank documents reviewed by Askume showed the company raised funds by selling wealth management products to retail investors, while its trust subsidiary Zhongrong charged interest rates of more than 12% on one-year loans from developers such as Country Garden. While this is not unusual for shadow banks, the benchmark bank lending rate is around 4%.
As business grew, Xi became close to developer heavyweights including China Evergrande Group Chairman Xu Jiayin and Country Garden Chairman Yang Guoqiang, according to three current and former employees. Both developers have since defaulted on loan repayments and Evergrande is undergoing court-ordered liquidation proceedings, while Country Garden faces the possibility of liquidation proceedings . None responded to Zhongzhi Relations’ requests for comment.
A current Zhongxhi employee and two former employees said Zhongxhi staff received exorbitant bonuses as the property boom spurred growth and demand for high-yield wealth management products. Xi donated large sums of money to his alma mater, Fudan University, and organized summer vacations for top-performing employees at which he read poetry, the two people said. The university did not respond to questions about the unspecified donations.
Meanwhile, according to two investors and now-deleted state media reports, salespeople at Zhongzhi’s subsidiaries trumpeted the group’s ties to local governments and the fact that its trust subsidiary was backed by its largest shareholder, state-owned Jingwei Textile Machinery Co. Jingwei did not respond to a request for comment on the nature of its involvement with Zhongzhi.
Xi died of heart disease in 2021, aged 61. That year also saw the start of a liquidity crisis in the property sector, with Chinese regulators clamping down on debt-driven construction by developers to prevent spillover risks to the broader financial sector.
In July of the same year, a subsidiary of Zhongzhi promoted a wealth management product to cover the rising pressure.
According to exchange screenshots reviewed by Askume, in July 2022, a seller of Hengtang Wealth wrote to investors in the WeChat group: “This is a fixed return product.” The seller assured that the return rate for three-month wealth management products with investment amount exceeding 1 million yuan (about 140,000 US dollars) is at least 6.2%, which is higher than the 1.5% return rate for local bank deposits.
The seller said the Zhongzhi subsidiary “undertakes an absolute, unconditional and irrevocable obligation” to make timely payments to investors, and gave three thumbs-up emoticons.
The strategies and proposals of Zhongzhi’s sales staff have attracted thousands of investors. But as developers across the country faced cash flow problems, they defaulted on loans from Zhongrong, a licensed trust company. In turn, Zhongrong also defaulted on payments to investors.
As difficulties mounted, Wang Qiang, secretary of Zhongrong’s board of directors, briefed dozens of angry investors at the company’s Beijing headquarters in August 2023. Projects and the company struggled to pay redemption fees, according to minutes of the meeting reviewed by Askume and four current and former Zhongzhi employees and two investors.
“The product is definitely not returned,” Wang said. “Without returns, how can we pay back investors? Either release new products or rely on the remaining cash.” But he said the cash had run out by July 28 that year.
When asked by investors whether Zhongrong was involved in capital pool business prohibited by regulations, Wang admitted: “Some products have the characteristics of capital pool.”
One current employee and three former employees said Zhongzhi increasingly adopted the practice in early 2022 as developers were defaulting on loans and its coffers ran dry. They said the move was intended to conceal Zhongzhi’s deteriorating situation.
Reporters were unable to contact Mr. Wang for comment through Zhongrong.
after the fall
Zhongzhi’s collapse was largely due to heavy loans it made to cash-strapped developers, many of whom turned to shadow banks to borrow money as Beijing’s crackdown deprived them of access to major banks, three current and former employees said.
Citigroup data shows that as of the end of 2022, Zhongrong’s real estate investment accounted for 10.7% of its total assets under management, higher than the industry average of 5.8%. Zhongrong provided almost the same figures in its 2022 annual financial statements.
Bankruptcy proceedings can take a long time. On June 28, a Beijing court said Zhongzhi’s bankruptcy administrator had applied for a “substantial merger” and liquidation of the company and 247 related companies. The administrator, Beijing Dacheng Law Firm, did not respond to Askume’ questions about the process.
Some Zhongzhi investors told Askume they had lost hope of getting their money back.
Ms. Wang, 51, who owns a technology company in Shenzhen, thought she had “erred on the side of caution” when she invested 1 million yuan in Zhongzhi’s Zhonghai Shengrong, a four-year-old product.
The investment contract signed by Mr. Wang in May 2020 and reviewed by Askume said the expected return rate was 11%, while the three-year bank deposit benchmark interest rate was 2.75%. The documents show that the funds raised from the product will be used for the entity’s “working capital.”
But months before Wang’s returns were due, Zhongzhi declared bankruptcy.
“Turns out I was trapped in a landslide,” she said.
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