Zhongzhi shows China’s fear of losing control
The travails of Zhongzhi, a key player in China’s poorly regulated $3 trillion shadow financing market, underline why a future crisis in the country is more likely, not less.
Zhongzhi Enterprise Group declared itself on Thursday to be 'severely insolvent', with a debt pile of up to Rmb460 billion ($64.7 billion), against assets of just Rmb200 billion.
In the ensuing days, more details about the travails of the conglomerate, a key player in China’s sprawling and poorly regulated $3 trillion shadow financing market, spilled out into the public domain.
Beijing police accused the firm of having committed “illegal crimes”. In a letter to investors, the company admitted its management had run “wild”, resulting in investment products defaulting “one after the other”.
According to some estimates, three quarters of investor cash, as much as $56 billion, will be lost. Clients, most of them wealthier individuals, may recoup at little as $14 billion.
Zhongzhi’s case is far from unique. Beijing has allowed Baoshang, a regional lender once owned by a private conglomerate, to fail. An investment firm in central Henan province was accused of running a Ponzi-like scheme, with billions of dollars in deposits being frozen at village lenders. A local asset manager from the rustbelt northeast bailed out Shengjing Bank after borrowing heavily from the very company it was saving.