(Reuters) – Faced with a liquidity crisis, Zhongzhi Enterprise Group will conduct a debt restructuring, the Chinese asset manager has told investors, as a deepening property sector downturn raises fears about spillover risks to the broader financial sector. Beijing-based Zhongzhi, which has sizable exposure to real estate, has stopped payment to investors in all investment products, its management told investors in a meeting on Wednesday, a video seen by Reuters showed.
Zhongzhi’s financial trouble is the latest challenge for Chinese authorities as they battle to contain a worsening property sector crisis and revive a faltering recovery in the world’s second-largest economy.
Morgan Stanley (NYSE:MS) has become the latest among some of the major brokerages to cut China’s growth forecast for this year. It now sees China’s gross domestic product (GDP) growing 4.7% this year, down from an earlier forecast of 5%.
Asset managers like Zhongzhi raise hundreds of billions of dollars by selling shadow banking-linked and high-yielding investment products through trust and wealth management units, and have strong linkages with banks and other financial firms.
A string of defaults in China’s $3 trillion shadow banking sector could have a chilling effect across the economy as many individual and institutional investors are exposed to the trust products.
Zhongzhi has hired one of the Big Four accounting firms to conduct a comprehensive audit of the company, and is seeking strategic investors, its management told investors in Wednesday’s meeting.
The plan is for “self-rescue” through restructuring, with a focus on debt collection and asset liquidation, but bankruptcy is also an option, they added, without disclosing the amount of debt that needed to be restructured.
It was not possible to determine whether the company is insolvent before the completion of auditing work, which began in July, the executives told its investors, according to the video seen by Reuters.
Zhongzhi, which, according to domestic media, manages over 1trillion yuan ($136.70 billion) in assets, did not immediately respond to a request for comment.
The meeting was held after Zhongrong International Trust Co, a leading trust company controlled by Zhongzhi, missed payments on dozens of investment products since the end of July, Reuters reported on Wednesday, citing sources.
Anxious retail investors are bombarding listed companies with questions about their exposure to Zhongrong after missed payments by the trust company triggered fears of contagion across the country’s financial system.
Citigroup (NYSE:C) said in a note it expected more trust defaults due to the property sector downturn in China, but that trend was unlikely to lead to a “Lehman moment” scenario.
“As the problems in the property development sector are not new and have already been unfolding for several years, we think investors would have already psychologically prepared for the potential of defaults.”
PROPERTY CRISIS
The liquidity stress facing Zhongzhi highlights the ripple effect of an unprecedented debt crisis in China’s property sector, which accounts for roughly a quarter of the economy that has rapidly lost momentum in recent months.
Zhongzhi runs a shadow banking empire, holding stakes in five asset management companies, four wealth management firms, and Zhongrong International Trust, a major trust company that manages more than 700 billion yuan ($95.69 billion) of assets.
The group has been selling stakes in some listed companies it controlled over the past few years, and reducing the size of it business, which came under increased pressure after China’s crackdown on shadow banking, and the property market downturn.
China’s property market has lurched from one crisis to another in the last couple of years with a string of leading developers including China Evergrande Group and Sunac China defaulting on their debt repayment obligations.
Country Garden, the country’s largest private developer, has become the latest to flag a stifling liquidity crunch at a time when property investment, home sales and new construction have contracted for more than a year.
Evergrande said late on Wednesday it would delay the voting date and scheme meetings with creditors for its offshore debt restructuring plan to Aug 23 and Aug 28, respectively, to give creditors more time to consider the terms.
The delay comes after the deal this week to sell a 27.5%stake in its unit China Evergrande New Energy Vehicle Group, and swap part of the debt in the NEV unit owed to the parent company and current controlling shareholder into shares.
Evergrande is the first defaulted developer to hold scheme meetings and its years-long restructuring practice highlights the challenges facing its peers to put their operations to back on track.
($1 = 7.3155 Chinese yuan renminbi)
