China’s Troubled $137 Billion Shadow Bank Plans Debt Restructuring, Taps KPMG

The Chinese shadow banking giant whose liquidity crisis has fanned fears about financial contagion is planning to restructure its debt and has hired KPMG LLP to conduct an audit of its balance sheet, people familiar with the matter said.

(Bloomberg) — The Chinese shadow banking giant whose liquidity crisis has fanned fears about financial contagion is planning to restructure its debt and has hired KPMG LLP to conduct an audit of its balance sheet, people familiar with the matter said.

Zhongzhi Enterprise Group Co. hired KPMG in late July to review its balance sheet amid a worsening liquidity crunch, said the people, asking not to be identified as the matter is private. The Beijing-based company plans to restructure debt and sell assets after the review in order to repay investors, the people said. The company manages more than 1 trillion yuan ($137 billion) of assets.

Read more: China Police Visit Shadow Bank Investors at Home to Quash Unrest

It wasn’t immediately clear how many products Zhongzhi has defaulted on and whether the company has sufficient assets to cover the shortfall if liquidated, said the people, adding that any restructuring process will likely be lengthy. Zhongzhi has suspended payments on nearly all its products, the people said.

The Chinese firm didn’t respond to emails asking for comment, while calls to KPMG weren’t answered.

Zhongzhi, one of the country’s largest private wealth managers, is the latest financial giant to face the prospect of failure as the fallout from a deepening property slump spreads. Country Garden Holdings Co., which was previously the nation’s biggest property developer, is on the brink of default after sales plunged and it failed to meet an initial deadline to pay coupons on dollar bonds.

In a sign that Chinese authorities are worried about potential contagion, the banking regulator has set up a task force to examine risks at Zhongzhi. While little known outside China, Zhongzhi is among the biggest players in the country’s $2.9 trillion trust industry. Many trust products are backed by real estate projects run by troubled developers such as China Evergrande Group.

The concern is Zhongzhi becomes unable to draw sufficient new investment to replace maturing funds, increasing the risk of more missed payments, said Dinny McMahon, an analyst for consultancy Trivium China and author of China’s Great Wall of Debt. 

“When investors start to lose faith, then all of a sudden an outfit’s ability to continue to raise new funds becomes more difficult,” McMahon said. “Then the potential for defaults to cascade becomes more and more.”

One Zhongzhi-backed trust company, Zhongrong International Trust Co., has missed payments on dozens of products and has no immediate plan to make clients whole. Zhongrong has 270 high-yield products totaling 39.5 billion yuan ($5.4 billion) due this year, according to data provider Use Trust. 

Market Selloff

The crisis in the shadow banking system is worsening a selloff in Chinese financial markets, which are already under pressure from disappointing economic data and the slumping property market. While the nation’s top leaders have vowed to boost domestic consumption and support the private sector, they have yet to announce any new stimulus measures. Adding to the stress, Chinese local corporate bond defaults are running at the highest levels since the beginning of the year.

The MSCI China Index fell as much as 2% on Thursday in a fifth day of losses, before erasing declines. The offshore yuan is near a record low against the greenback.

China’s trust industry pools savings from wealthy households and corporate clients to make loans and invest in real estate, stocks, bonds and commodities.

According to Bloomberg Economics, the trust sector’s exposure to real estate is about 2.2 trillion yuan, or 10% of total assets as of the end of 2022. Zhongrong is the ninth-biggest trust, with about 600 billion yuan in assets.

Read more: China’s Housing Slump Is Much Worse Than Official Data Shows

Pressure is building on President Xi Jinping’s government to cap the contagion risks and prevent social unrest. About two dozen people protested outside Zhongrong’s office in Beijing this week, a notable show of public outrage in a country with little tolerance for dissent.

Zhongrong products paid out as much as 7% in annual interest, appealing to mostly wealthy individuals and companies who bet they would be safe investments as Chinese stocks and real estate prices tumble.

In a video clip of the protest seen by Bloomberg News, a woman angrily asks: “Why doesn’t the company pay us back?”

–With assistance from Lisa Du.

(Updates to add quote from seventh paragraph, updates market prices)

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