China has asked two of the nation’s biggest financial firms to examine the books of Zhongrong International Trust Co., potentially paving the way for a state-led rescue of the troubled shadow lender, according to people familiar with the matter.
(Bloomberg) — China has asked two of the nation’s biggest financial firms to examine the books of Zhongrong International Trust Co., potentially paving the way for a state-led rescue of the troubled shadow lender, according to people familiar with the matter.
Citic Trust Co., a unit of conglomerate Citic Group Corp., and CCB Trust Co., backed by China Construction Bank Corp., will lead the effort to stabilize operations at Zhongrong, said the people, who asked not to be identified discussing a private matter. It couldn’t immediately be determined what might result from their involvement, though a similar examination by Citic of Huarong Asset Management Co. led to a $6.6 billion bailout of the bad-debt manager in 2021.
The plan underscores growing concern among policymakers about the $2.9 trillion trust sector’s impact on financial stability amid disappointing economic growth and a worsening property slump.
It’s also another sign of how Beijing is leaning on stronger state-owned companies to shore up the economy and keep risks in check. Shares of government-run banks slumped on Wednesday after Bloomberg reported they will cut rates on existing mortgages as part of official efforts to boost consumer spending.
Zhongrong and closely linked wealth firm Zhongzhi Enterprise Group Co. roiled markets earlier this month after halting payments on scores of investment products sold to wealthy individuals and companies, even sparking rare protests in Beijing.
Prior to their troubles becoming public, the National Administration of Financial Regulation established a working group in July to examine risks at Zhongrong, people familiar with the matter said earlier. Almost half of the funds raised by Zhongrong were funneled to its parent or affiliated units, one of the people said.
Citic Trust declined to comment. Representatives of the NAFR, Zhongrong and CCB Trust didn’t respond to requests seeking comment.
While losses have been building in the trust industry for years, Zhongzhi may pose the biggest challenge yet. The private firm manages more than 1 trillion yuan ($137 billion) and its interconnectedness with wealthy investors, struggling developers and other financial institutions has spurred concern that troubles are beginning to cascade across the financial industry.
China’s trust industry is a key alternative funding source for weaker borrowers unable to get regular bank loans such as real estate developers and local government financing vehicles. Trusts pool money from clients and invest them into a variety of instruments and projects.
The sector could face losses of the equivalent of $38 billion, according to a Goldman Sachs Group Inc. estimate.
Property-linked products have accounted for more than 70% of the defaults in recent quarters. Property developers are mired in a slump with former giants such as China Evergrande Group defaulting on their debt and others such as Country Garden Holdings Co. struggling to pay their debts as home sales and prices decline.
The trust sector has already seen several state rescues. In 2020, the government was involved in Shanghai-listed Anxin Trust Co.’s restructuring plan to avoid triggering “systemic financial risks.” The banking regulator also assumed control of New Times Trust Co. and New China Trust Co., along with seven other financial firms linked to Tomorrow Group.
Late that year, authorities took over Sichuan Trust Co. to maintain social and financial stability after the Chengdu-based company failed to pay at least 40 million yuan of products and hundreds of investors gathered at its headquarters to demand their money back.
New China Trust was declared bankrupt this year after three years of rescue efforts failed, becoming the first player in the industry to go under since the Trust Law was enacted in 2001.
Trust firms have billions of payments due to investors. Zhongrong alone has 270 products totaling 39.5 billion yuan due this year, according to data provider Use Trust.
Citic Trust had 1.5 trillion yuan of assets under management while CCB Trust oversaw about 1.4 trillion yuan.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.