Continuous troubles have besieged Zhongzhi, a leading private financial conglomerate in China, making it the center of a criminal investigation and facing the risk of bankruptcy due to severe liquidity issues.
On November 27th, Beijing police officially launched an investigation into Zhongzhi Enterprise Group’s asset management unit. Notably, this investigative action comes just days after the company informed investors that they were facing “serious payment difficulties.”
Specifically, Zhongzhi is currently in debt for a total of 460 billion Chinese yuan (equivalent to 65 billion USD), while their assets amount to only 200 billion Chinese yuan (29 billion USD).
“Liquidity is exhausted, and assets have severely diminished. Preliminary assessments indicate that the conglomerate is unable to meet its obligations, and significant operational risks are occurring.”
Excerpt from Zhongzhi’s announcement to its shareholders
Shortly thereafter, the conglomerate publicly apologized for its financial difficulties. It cited the reason for these challenges as the passing of founder Xie Zhikun in 2021 and the departure of senior executives, leaving the company struggling with an “inefficient” internal management system.
The Zhongzhi case has delivered a significant blow to China’s financial landscape as Zhongzhi is one of China’s massive “shadow banks,” valued at 3 trillion USD. Therefore, the potential bankruptcy of Zhongzhi could lead to the loss of tens of billions of USD.
*Shadow banking is an important source of finance that provides high returns compared to traditional banking deposits but carries many risks.
Ying Yue, a lawyer at Leaqual Law Firm in Shanghai, predicts that more than 75% of the invested funds may be lost, with only 100 billion Chinese yuan (14 billion USD) possibly being recovered from the total debt of 460 billion Chinese yuan owed by the conglomerate.
Sun Jianbo, the founder of China Vision Capital, a Beijing-based asset management company, stated that assets with no value are often sold at discounts of up to 70%. According to Bloomberg’s calculations, this means that investors may only recover about 13% of the funds they have invested.
It is known that Zhongzhi is a primarily asset management conglomerate that offers high-interest accounts to thousands of wealthy investors, often utilizing households’ savings to provide loans or invest in real estate, stocks, bonds, and commodities.
Recently, as many trust funds have reduced risks, Zhongzhi and related companies, especially Zhongrong International Trust Co., continued to provide financial support to struggling developers and purchased assets from businesses, including the China Evergrande Group. This has contributed to the downfall of the giant Zhongzhi.
It can be seen that this incident is a warning bell for wealthy investors in China who often seek high profits from products offered by asset management companies like Zhongzhi.