China Investigates Major Shadow Bank’s Billions in Real Estate Loans

(CTN News) – One of China’s largest shadow banks is under scrutiny after lending billions to real estate companies.

Zhongzhi Enterprise Group’s (ZEG) asset management division allegedly managed over one trillion yuan ($139 billion; £110 billion) at its peak.

The firm was the subject of an investigation into “suspected crimes,” according to a statement released over the weekend by the authorities.

This follows rumors that ZEG had filed for bankruptcy just days earlier.

According to reports, last week, the struggling corporation informed investors in a letter that its liabilities, which may reach $64 billion, exceeded their assets, currently valued at approximately $38 billion.

The identity and function of the “many suspects” whose “criminal coercive measures” the authorities claimed to have implemented remain unknown. In 2021, Xie Zhikun, the founder of the company, passed away due to a heart attack.

There is a network of lenders, brokers, and other credit intermediaries in China known as “shadow banking,” and ZEG is a big participant in this sector. Due to its lack of oversight, shadow banking can operate with more capital, liquidity, and risk than regulated banks.

The approximate worth of China’s shadow banking sector is $3 trillion.

The country’s real estate market frequently receives a financial boost from it. A severe credit constraint has slammed the once-booming industry, putting some of the biggest enterprises on the verge of financial catastrophe.

It took money to create the property bubble China has been chasing for decades, and the country needed money to fuel its expansion. Thus, they began receiving substantial funds from individual investors, promising extremely high returns.

Shadow banking specialist Andrew Collier of Orient Capital Research thinks it was successful for a while because of rising property values, and everyone involved came out ahead.

While informal lending has always been a part of China’s economy, the 2008 financial crisis and subsequent shortage of credit led to the rise of shadow banking.

With China’s economy in shambles and the real estate market in shambles, Mr. Collier predicts that ZEG’s problems are only the beginning: “This is going to spread further into other forms of shadow banks and potentially into the actual real brick-and-mortar banks.”

The troubled real estate developers are in debt to Chinese banks for 30% of those institutions’ total assets.

It will take a long time for that to relax, Mr. Collier says.

Concerns about additional instability in the world’s second-largest economy have been heightened by the newest developments at ZEG following the bankruptcy of Evergrande and, more recently, the financial problems at Country Garden.

One-third of China’s GDP comes from the real estate market. Apartments are a product of several sectors, including those that build them, provide leasing and brokering services, and produce building materials.

According to the most recent data, the Chinese economy grew by 4.9% in the quarter ending in September. The GDP grew 6.3% in the preceding quarter, so that’s slower.