SHANGHAI – One of China’s largest private wealth managers is triggering fresh anxiety about the health of the country’s shadow banking industry after missing payments on multiple high-yield products.

Three firms said late last Friday that they failed to receive payments on products issued by companies linked to Zhongzhi Enterprise Group, which has about one trillion yuan (S$187 billion) in assets under management.

One of the linked companies, Zhongrong International Trust, bought stakes in real estate projects in 2022, betting on a market rebound that has so far failed to materialise.

The missed payments have put a fresh spotlight on China’s US$2.9 trillion (S$3.9 trillion) trust industry, which combines characteristics of commercial and investment banking, private equity and wealth management. Firms in the sector pool household savings to offer loans and invest in real estate, stocks, bonds and commodities.

While China trusts have faced years of turbulence after regulators clamped down on the nation’s shadow banking excesses, signs of turmoil at a major industry player have spooked markets already on edge over the state of China’s economy and property market.

One of the nation’s largest developers, Country Garden Holdings, is on the brink of default, while loans extended by Chinese banks fell to the lowest level since 2009 in July.

Chinese stocks slumped on Monday, with the CSI 300 Index down 0.73 per cent at the end of the trading day, and the Hang Seng China Enterprises Index tumbling 1.79 per cent.

“The biggest problem now is how to isolate the risks associated with Zhongzhi group so that it doesn’t cause confidence of the entire trust industry to collapse,” said Mr Shen Meng, a director with Beijing-based investment bank Chanson & Co. “If the situation continues to worsen, expect the scale of the risks to be no less than when a leading property developer defaults.”

The trust industry, once seen as a safe place by wealthy Chinese to park their money for hefty returns, has over the past years been a growing concern for the authorities, which have sought to rein in its scope. The industry has been plagued by missed payments over the past years, in particular on investments related to real estate.

Beijing-based Zhongzhi was founded in 1995 by Mr Xie Zhikun, who built the firm into a sprawling empire. Mr Xie died of a heart attack in 2021, just as Covid-19 and pandemic lockdowns slowed China’s economy and increased volatility in its capital markets.

While his replacement, Mr Liu Yang, has vowed to keep the company’s strategic focus on industrial and asset management businesses unchanged, the economic slowdown and the property market slump have weighed on its operations.

Zhongzhi is the second-largest shareholder of Zhongrong trust, with its ownership at around 33 per cent. The conglomerate also holds stakes in five other licensed financial firms, including a mutual fund manager and two insurers, and invested in five asset management companies and four wealth units, according to its website. It also controls listed companies and owns 4.5 billion tonnes of coal reserves among its industrial operations.

Zhongrong alone has 270 products totalling 39.5 billion yuan due in 2023, according to data provider Use Trust. The average yield on those products amounted to 6.88 per cent, compared with the benchmark 1.5 per cent one-year deposit rate paid by banks.

Forged letters

The trust company has disclosed little to the public about its situation, although it has said it is aware of forged letters being shared on social media saying the company is no longer able to operate. The firm has reported them to the authorities, according to a statement on its website.

In one unverified letter being circulated on social media, a wealth manager at Zhongzhi apologised to his clients, saying the group’s wealth arms have decided to delay payments on all products since mid-July. The incident involves more than 150,000 investors with outstanding investments totalling 230 billion yuan, according to the letter.

The prolonged slump in China’s property sector has brought previously sound property developers to their knees.

The sector is caught in a vicious circle where failing developers put home buyers off purchases, which then limits the cash flow of companies. Home sales tumbled the most in a year in July.

The missed payments show “how the real estate’s liquidity problem can create a domino effect on other sectors, including the trust industry”, said Mr Gary Ng, senior economist at Natixis. “It would not be surprising to see more trusts with a high asset allocation towards real estate face payment issues.”

Real estate accounted for 11 per cent of Zhongrong’s trust assets, followed by 42 per cent in industries and 33 per cent in financial institutions, according to its annual report. The company was previously fined 200,000 yuan by regulators for investing in a property project that lacked relevant approvals, and pledged to improve compliance.

Trust firms, including Zhongrong and MinMetals Trust, bought stakes in at least 10 real estate projects in 2022, betting that unfinished homes will eventually yield cash to pay off some of the US$230 billion in property-backed funds they have issued to investors. BLOOMBERG