SHANGHAI/BEIJING/HONG KONG (Reuters) – Zhongzhi Enterprise Group, a former chief of China’s shadow banking sector that declared insolvency final yr, used aggressive and probably unlawful gross sales practices to maintain its operations because it lurched towards collapse, based on information reviewed by Reuters and eight folks with direct data of the matter.
China’s years-long property increase had propelled Beijing-headquartered Zhongzhi to the highest of the nation’s $18 trillion asset-management trade and made it a key participant in a shadow banking sector the dimensions of the French financial system. Asset managers equivalent to Zhongzhi promote wealth-management merchandise to buyers. The proceeds are then channeled by licensed belief corporations like its Zhongrong unit to builders and different corporations that can’t faucet financial institution funding instantly due to poor creditworthiness or different causes.
Beforehand unreported particulars present that a couple of yr earlier than its monetary troubles burst into the open, Zhongzhi models have been paying returns to current buyers in wealth-management merchandise through the use of funds from new buyers, and promising particular person buyers profitable returns that belied the group’s publicity to a deepening property disaster.
China’s belief corporations are referred to as shadow banks as a result of they function exterior lots of the guidelines that govern business lenders. However China’s high banking regulator in 2018 specified that monetary establishments together with shadow banks and asset managers mustn’t arrange capital swimming pools, to forestall them from utilizing cash from new gross sales to cowl returns on current wealth-management merchandise, nor ought to they assure returns on wealth-management merchandise.
Zhongzhi seems to have violated each these necessities, two attorneys mentioned after reviewing Reuters’ findings on the request of the information company. The attorneys added that such wrongdoing can lead to fines and jail sentences of as much as 10 years.
“The core of its suspected illegal action is raising money from investors through its licensed financial institutions to fund the group’s business operations and expansion,” mentioned Zhang Guanghui, an lawyer at Guangdong Suijia Legislation Agency.
Zhongzhi and its models recognized on this story didn’t reply to detailed requests for remark concerning the practices outlined by Reuters.
Chinese language officers have been equally tight-lipped. China’s ministries of public safety and justice, which oversee the Beijing police and prosecutors, respectively, didn’t reply to queries concerning the instances towards folks related to the shadow financial institution. China’s Nationwide Monetary Regulatory Administration and central financial institution additionally didn’t reply to requests for remark about Zhongzhi models’ practices.
The liquidity disaster at Zhongzhi turned public when belief unit Zhongrong missed funds on dozens of merchandise within the third quarter of 2023, fueling investor protests and worries that China’s property meltdown was spilling over into its $66 trillion monetary trade.
Ultimately, Zhongzhi informed buyers in November 2023 that it was bancrupt with as much as $64 billion in liabilities. The group filed for chapter liquidation in January, whereas Beijing police probed its enterprise practices. In March, Beijing police mentioned on WeChat that wealth-management corporations beneath Zhongzhi ought to cooperate with police and return any unlawful earnings.
In August, Beijing prosecutors mentioned that they had charged 49 suspects associated to Zhongzhi on suspicion of illegally absorbing public deposits, with out offering particulars.
Public deposits flowed into Zhongzhi’s shadow financial institution operation through the funds the buyers positioned within the wealth-management merchandise that Zhongzhi’s licensed monetary models have been promoting. Reuters could not decide the particular deposits or models to which the prosecutors have been referring.
Interviews with present and former Zhongzhi group employees and buyers, in addition to information reviewed by Reuters, shed new mild on how its models’ presumably unlawful practices uncovered middle-class savers to damaging penalties of China’s property bust, regardless of regulators’ efforts to rein within the shadow banking sector’s excesses.
The eight sources spoke to Reuters on the situation of anonymity, citing worry of official retribution.
RAGS TO RICHES
Zhongzhi was based in 1995 by Xie Zhikun, a rags-to-riches tycoon who began with timber and real-estate companies earlier than increasing into monetary providers.
In its heyday, Zhongzhi cashed in on China’s booming property market. It raised funds by promoting wealth merchandise to retail buyers whereas belief arm Zhongrong charged builders like Nation Backyard an rate of interest of over 12% on one-year loans, based on 4 Zhongrong funding banking paperwork dated 2017, which Reuters reviewed. Whereas this wasn’t unusual for shadow banks, the benchmark financial institution lending charge was round 4%.
As enterprise soared, Xie rubbed shoulders with developer magnates, together with China Evergrande (HK:) Group chief Hui Ka Yan and Nation Backyard head Yang Guoqiang, based on three present and former employees. Each builders have since defaulted on debt repayments and property builds; Evergrande goes by means of a court-ordered liquidation course of, and Nation Backyard is dealing with the prospect of 1. Neither responded to requests for remark about their ties to Zhongzhi.
Zhongzhi employees raked in sky-high bonuses because the property increase turbocharged each progress and demand for high-yielding wealth merchandise, mentioned one present and two former Zhongrong employees. Xie gave huge sums to Fudan College, his alma mater, and held summer season getaways for top-performing employees, the place he would recite poetry, two of those folks mentioned. The college didn’t reply to questions concerning the unspecified donations.
In the meantime, salespeople in Zhongzhi models have been touting the group’s connections with native governments and its belief unit’s backing by state-owned Jingwei Textile Equipment Co., its largest shareholder, based on two buyers and now-deleted state media experiences. Jingwei didn’t reply to a request for remark concerning the nature of its involvement with Zhongzhi.
Xie died in 2021, aged 61, after a coronary heart assault. That yr additionally marked the start of the property sector’s liquidity disaster as Chinese language regulators cracked down on builders’ debt-fueled development to curb spillover threat to the broader monetary sector.
In July that yr, one Zhongzhi unit’s gross sales pitch for a wealth-management product masked the rising pressure.
“This is a fixed-return product,” a Hold Tang Wealth salesperson wrote to buyers in a WeChat group in July 2022, based on a screengrab of the change reviewed by Reuters. The salesperson assured a minimal 6.2% return on a three-month wealth administration product on investments exceeding 1 million yuan, or about $140,000, outstripping the 1.5% on native financial institution deposits.
The Zhongzhi unit “assumes the full, unconditional and irrevocable obligation” for well timed reimbursement to buyers, the salesperson mentioned, giving three thumbs-up emoji.
Zhongzhi salespeople’s ways and claims pulled in 1000’s of buyers. However as builders throughout the nation began to undergo money movement points, they defaulted on loans they owed to Zhongrong, the licensed belief unit. In flip, Zhongrong defaulted on sums owed to buyers.
As difficulties mounted, Zhongrong board secretary Wang Qiang briefed dozens of offended buyers on the firm’s Beijing headquarters in August 2023. Wang informed them that funds from some Zhongrong wealth-management merchandise had been invested in tasks that have been not producing returns, and that the corporate was consequently struggling to pay redemptions, based on a recording of the assembly reviewed by Reuters, in addition to 4 present and former Zhongzhi workers and two buyers.
“There must have been no returns from the products,” Wang mentioned. “With no returns, what can we use to repay investors? Either issue new products or rely on the remaining cash.” However by July 28 that yr, the money had run out, he added.
Pressed by an investor on whether or not Zhongrong had engaged in capital pool enterprise, which the laws prohibit, Wang acknowledged: “Some of the products have characteristics of capital pools.”
Zhongzhi had more and more employed such apply beginning round early 2022, as builders defaulted on loans and its coffers ran dry, mentioned one present and three former Zhongzhi unit workers. The impact, they mentioned, was to hide Zhongzhi’s deteriorating place.
Wang couldn’t be reached for remark by means of Zhongrong.
AFTER THE FALL
Zhongzhi’s collapse to a big extent was precipitated by its outsized mortgage publicity to cash-starved builders, lots of which had turned to shadow banks to borrow as Beijing’s crackdown had reduce them off from predominant avenue lenders, based on three present and former workers.
Zhongrong’s real-estate funding publicity accounted for 10.7% of its whole belongings beneath administration as of the top of 2022, increased than the trade common of 5.8%, based on Citigroup. Zhongrong offered a near-identical determine in its annual 2022 monetary assertion.
The chapter proceedings are more likely to take a very long time. On June 28, a Beijing court docket mentioned Zhongzhi’s chapter administrator had utilized for “substantial consolidation” and liquidation of the corporate and 247 affiliated corporations. The administrator, Beijing Dacheng Legislation Workplaces, didn’t reply to Reuters questions concerning the course of.
Some Zhongzhi buyers informed Reuters they’ve misplaced hope of getting their a refund.
Wang, a 51-year-old who owns a tech firm in Shenzhen, thought she was “playing safe” when she invested 1 million yuan in a four-year time period product of a Zhongzhi unit, Zhonghai Shengrong.
The funding contract Wang signed in Could 2020, which Reuters reviewed, mentioned the anticipated charge of return was 11%, in contrast with a benchmark three-year financial institution deposit charge of two.75%. Funds raised from the product would go to the unit’s “working capital”, the doc confirmed.
However a number of months earlier than Wang’s returns on maturity have been due, Zhongzhi declared insolvency.
“It turned out I was caught in the landslide,” she mentioned.
($1 = 7.0850 renminbi)
