Chinese asset manager, Zhongzhi Enterprise Group, has announced plans for a debt restructuring as it faces a liquidity crisis. This comes as the property sector in China continues to decline, raising concerns about the potential impact on the broader financial sector. Zhongzhi, which has significant exposure to real estate, has stopped payment to investors in all investment products. The company has hired a Big Four accounting firm to conduct an audit and is seeking strategic investors as part of its self-rescue plan. However, bankruptcy is also being considered as an option. Zhongzhi’s financial troubles highlight the ongoing challenges facing Chinese authorities as they try to revive the country’s faltering economy and contain the property sector crisis.
Chinese asset manager, Zhongzhi Enterprise Group, has announced plans to conduct a debt restructuring as it faces a liquidity crisis. The company, which has significant exposure to the real estate sector, has stopped payment to investors in all investment products. This development comes as China’s property sector faces a deepening downturn, raising concerns about spillover risks to the broader financial sector. Zhongzhi’s financial troubles highlight the challenges faced by Chinese authorities in containing the property sector crisis and reviving the country’s economy. Morgan Stanley has also cut China’s growth forecast for this year, predicting GDP growth of 4.7% compared to an earlier forecast of 5%.
Zhongzhi is one of many asset managers in China that raise funds by selling shadow banking-linked and high-yielding investment products. These products are sold through trust and wealth management units and have strong ties to banks and other financial institutions. The recent string of defaults in China’s $3 trillion shadow banking sector has raised concerns about the potential impact on the wider economy, as many investors are exposed to these trust products. In response to its financial troubles, Zhongzhi has hired one of the Big Four accounting firms to conduct an audit and is seeking strategic investors. The company is focused on debt collection and asset liquidation as part of its restructuring plan.
The liquidity stress faced by Zhongzhi is indicative of the ripple effect of the debt crisis in China’s property sector. The property market, which accounts for around a quarter of China’s economy, has been experiencing a rapid decline in recent months. Zhongzhi operates a shadow banking empire and holds stakes in asset management companies, wealth management firms, and a major trust company. The group has been selling stakes in listed companies it controls and downsizing its business due to the crackdown on shadow banking and the downturn in the property market. Several leading developers, including China Evergrande Group and Sunac China, have already defaulted on their debt repayment obligations, contributing to the property crisis.
While the property sector downturn in China is expected to lead to more trust defaults, analysts do not believe it will result in a "Lehman moment" scenario. Citigroup notes that investors are already psychologically prepared for potential defaults due to the ongoing problems in the property development sector. However, the liquidity crunch faced by Zhongzhi and the challenges faced by other developers highlight the difficulties in putting their operations back on track. Evergrande, for example, has delayed scheme meetings with creditors for its offshore debt restructuring plan, giving creditors more time to consider the terms.
In conclusion, the liquidity crisis faced by Zhongzhi Enterprise Group underscores the challenges faced by China’s property sector and its potential impact on the broader financial sector. As the property market continues to decline and more trust defaults are expected, investors and industry experts are closely monitoring the situation. The restructuring efforts by Zhongzhi and other developers will play a crucial role in determining the future stability of the Chinese economy.