- Investors gather in protest outside Zhongrong International Trust Co’s office.
- China’s trust sector faces turmoil as shadow banks struggle to repay clients.
- Zhongrong, the ninth largest trust in China, delays payments since late July.
A group of investors staged a protest outside the office of Zhongrong International Trust Co, one of China’s major shadow banks, after it once again failed to fulfill payments on numerous products.
Zhongrong holds the position of being the ninth largest trust in China, managing assets worth 600 billion Chinese yuan (approximately $82 billion). It has been deferring payments since late July, raising concerns about its financial stability.
According to Bloomberg, Zhongrong has missed payments on a range of products and currently lacks an immediate plan to make clients whole.
At least 30 products are now overdue, with Zhongrong reportedly halting redemptions on certain short-term instruments.
Deferred Payments since July
On Wednesday (August 16), approximately two dozen protesters gathered at Zhongrong to demand their rightful payments. A viral video of the incident depicts around 10 police and security officers stationed outside the office, attempting to pacify the agitated crowd.
In one video clip, accessed by Bloomberg, an irate woman questions the non-payment of her matured product from July 28. She exclaims, “Why doesn’t the company pay us back? It has already matured. Your financial statements indicated a profit.”
Another woman shouts, “Give us the money back, or we will die here.” A third person demands, “Why don’t you provide a clear explanation?“
The liquidity crisis gripping Zhongrong has raised concerns in Beijing, especially coming just days after Country Garden, China’s largest private-sector developer by sales, missed interest payments on two US-dollar-denominated bonds.
Both events are significant, highlighting the challenges faced by China’s trust companies. Once considered a secure avenue for affluent Chinese to invest and gain substantial returns, these trust companies are now grappling with repaying their clients.
Trust companies sell investment or trust products to corporate and wealthy clients, pooling funds for investment or loans to private companies, including real-estate developers.
As of the end of 2022, China’s trust sector had about 2.2 trillion yuan (around $302 billion) exposed to real estate, constituting 10 per cent of its total assets, as per Bloomberg Economics.
Recently, numerous trust firms have defaulted on billions of dollars in investment products, causing the industry to shrink by about 20 per cent from its peak in 2017, when regulators started addressing shadow-banking excesses.
Bloomberg Economics cautioned, “The significant risk lies in a potential negative feedback loop, where property stress triggers financial strains, weakening credit expansion and growth, further exacerbating the property sector’s downturn.”