China launches criminal investigation into ‘insolvent’ shadow bank

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Signage at the offices of Zhongrong International Trust Co. in Beijing, China, on Monday, August 21, 2023.

Hong Kong CNN –

The The problems of one of China’s largest private financial conglomerates have deepened as Zhongzhi is now the focus of a criminal investigation.

Beijing police have launched an investigation into Zhongzhi Enterprise Group’s asset management unit, authorities said over the weekend. The announcement came just days after the company told investors it was “seriously insolvent.”

According to a statement released on Saturday, police suspect Zhongzhi of “illegal crimes” and have taken “compelling criminal action” against a number of suspects, including one surnamed Xie. The group’s founder, Xie Zhikun, died of a heart attack in December 2021, but his nephews hold key positions in the group, according to Chinese state media.

“Investors are requested to actively cooperate with the police in the investigation and collection of evidence,” the police said, without elaborating on the crimes or the measures.

Under Chinese criminal procedure law, “criminal coercive measures” can mean anything from bail to trial or house arrest to detention or arrest.

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The office building of Zhongrong International Trust, a trust company partially owned by Zhongzhi Enterprise Group, in Beijing, China, August 22, 2023.

Zhongzhi controls nearly a dozen asset management firms. On Wednesday, the company told investors in a letter that it had “enormous debts” and couldn’t pay all its bills. Total liabilities were up to 460 billion yuan ($65 billion) and assets were 200 billion yuan.

“Liquidity is exhausted and asset impairment is severe,” Zhongzhi said said the letter, which was quoted by Chinese state news agencies. “Preliminary due diligence indicates that the group is highly insolvent and has significant ongoing operational risks.”

Zhongzhi apologized for its financial problems and said the company had struggled with “ineffective” internal management since the death of its founder in 2021 and the subsequent resignations of senior executives.

The group did not respond to a request for comment Monday.

The Beijing-based company is considered part of China’s $3 trillion “shadow banking” industry. a sector that is forming an important source of financing for the country. The term usually refers to financing activities that take place outside the formal banking system, either by banks through off-balance sheet activities or by non-bank financial institutions, such as. B. Trust companies.

Concerns about Zhongzhi’s finances were first sparked in August when a trust that partially owns the company – Zhongrong International Trust – missed payments to retail and corporate investors.

According to videos posted by CNN on Chinese social media, angry protesters were seen shouting slogans and demanding payments related to investment products issued by the company. At least three listed companies were also among the victims, with missed payments exceeding 110 million yuan ($15 million).

The missed payments highlight how long-lasting China’s real estate downturn could be spills over into the financial sector.

A major reason for the company’s financial problems is its close ties to the Chinese real estate sector. Zhongrong, which manages $87 billion in funds for corporate clients and high-net-worth individuals, has invested about a tenth of its money in real estate, according to its annual report last year.

But several companies in its real estate portfolio have struggled with a liquidity crisis since 2020 after regulators began cracking down on reckless borrowing by developers.