Missed Payments Spark Fear in China’s Shadow Banking Sector



by FARUK IMAMOVIC

Missed Payments Spark Fear in China’s Shadow Banking Sector
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A major development in China's financial sector has sparked concern among investors and analysts, as Zhongrong Trust, a prominent investment trust, failed to meet its payment obligations. This incident has intensified worries about the potential for a wider financial crisis stemming from the ongoing slump in China's property market.

Missed Payments and Rising Concerns

Zhongrong Trust, managing funds worth $87 billion as of the end of 2022, missed payments exceeding 110 million yuan ($15 million) in interest and principal on several investment products.

This lapse was disclosed in recent filings by at least three Chinese companies - Nacity Property Service, KBC Corporation, and Xianheng International Science and Technology. The missed payments have triggered a wave of anxiety among corporate investors and sparked rare public protests.

Zhongrong Trust is part of China's substantial "shadow banking" industry, which includes banks conducting off-balance-sheet activities and non-bank financial institutions like trust firms. This sector offers higher return rates and forms a crucial finance source in China, but its opaque nature has long caused concern among global investors.

Social Media Panic and Investor Response

News of Zhongrong’s payment failures has caused a stir on social media, fueling fears about the company's financial health and its ability to meet its obligations. Online speculation earlier this year suggested that Zhongzhi Group, the parent company of Zhongrong Trust, faced a liquidity crunch and had halted repayments on some of its investment products.

Investors have flooded the online forums of the Shanghai and Shenzhen stock exchanges, seeking information on listed companies' exposure to Zhongrong's products. The broader concern is a potential "contagion" effect impacting China's $2.9 trillion investment trust industry, deeply intertwined with the troubled real estate sector.

Analyzing the Risk and Economic Impact

Citi analysts, in a research report, acknowledged investor fears but noted that "systemic risks" were limited. They argued that potential trust defaults would not likely lead to a scenario akin to the 2008 Lehman Brothers collapse, which significantly exacerbated the global financial crisis.

However, the China Trustee Association reported that the total exposure of trust funds to the property sector was approximately 1.13 trillion yuan ($154 billion) as of March-end. This figure accounts for about 5% of the total trust funds in China.

Analysts from Nomura highlighted that these funds are now under significant threat due to the recent developments involving Zhongzhi and its subsidiaries. The current turmoil in China's financial sector, particularly within the shadow banking industry, could create further challenges for the country's economic growth.

As the situation unfolds, the focus remains on how China will navigate these complexities and what measures will be implemented to stabilize the industry and mitigate broader economic impacts.

China