Potential run on Shadow Banks in China as the property sector collapse could cause a banking run / collapse cycle. $3 Trillion of risk.
It will all depend on getting a bunch of skittish folks to invest more into the property sector (supporting liquidation prices for failing shadow banks) just at the time when Bankruptcy and Collapse in the shadow bank and property sectors are in the news.
Zhongzhi is the shadow (unregulated) bank that is now in bankruptcy. They are short $36.4 Billion and can not pay their debts. This is one of the bigger Shadow Banks, so the risk is that the rot is throughout the whole sector and a run on one starts a run on all and leads to complete banking collapse.
CHINA DEBT CRUNCH
Chinese shadow bank Zhongzhi’s bankruptcy accepted by Beijing court
Judges recognize the case to be ‘complicated’A court in Beijing accepted a bankruptcy application of Zhongzhi Enterprise Group, embattled wealth manager. Zhongrong International Trust is a trust company partially owned by Zhongzhi. © Reuters
KENJI KAWASE, Nikkei Asia chief business news correspondent
January 5, 2024 22:42 JSTHONG KONG – A court in Beijing declared on Friday that it has accepted an application for bankruptcy liquidation by Zhongzhi Enterprise Group, the embattled Chinese wealth manager with substantial debt.
The official document published by Beijing No.1 Intermediate People’s Court acknowledged that Zhongzhi is not capable to pay off their obligations, given the latest situation and the financial data presented by the company.
Zhongzhi is a major trust company that operates outside the banking regulator framework and seen as a considerable player as a shadow bank. A major investment trust under the group’s umbrella recently missed payments on a series of investment products, triggering protests from investors.
“protests” meaning folks in the street shouting “give us back our money”…
[…]
The total liabilities stood at 9.585 billion yuan ($1.35 billion), while its asset was 9.385 billion yuan as of the end of October, leaving a shortfall of about 200 million yuan.As only 1.8 million yuan of cash was available at that point, Zhongzhi admitted to the examination process by the court that it was “severely lacking liquidity.” Most of the receivables — which totaled 2.9 billion yuan — were “difficult to collect” as well.
The rest of its assets was in equity investments, office accommodations, investments in real estate, and intangible assets such as software.
The court deemed Zhongzhi to be insolvent and was “already impossible to clear off debts that are reaching maturity,” including separate cases being brought up by creditors in other courts and arbitration centers.
[…]
The company’s letter to investors was leaked on the Weibo social platform in the end of November, where it said it only had about 200 billion yuan in assets, while liabilities were around 420 billion to 460 billion yuan. The company apologized for the string of de factor defaults in investment products that were related to them.
So they have about 1/2 of their book value as actual assets… that’s gonna hurt.
Following the leaked letter, Beijing Public Security Bureau’s Chaoyang branch announced that they have taken “mandatory measures” against Zhongzhi via its official WeChat account, without providing details.
The connection is unclear, but two executives linked to Zhongzhi were soon found to have disappeared, according to disclosures by listed companies associated to the group. They are Ma Changshui, chairman of Xinjiang Tianshan Animal Husbandry Bio-Engineering, and Ma Hongying, chairwoman of Dalian My Gym Education Technology. Both Ma’s are major players within the Zhongzhi group, according to annual reports by respective listed companies.
Take the money and run? Get out from under the building before the Ponzi collapses on you?
Zhongzhi is a privately-owned company, also involved in mining, construction materials, chemical products and machinery. It held a 32.99% stake in Zhongrong International Trust, a leading Chinese asset manager, as of the end of 2022.
So fingers in lots of pies, all of which may now be up for liquidation…
The group was founded by Xie Zhikun, who died in December 2021 from a heart attack.
So… about 2 years ago… Stress much? /snark;
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So looks to me like “hitting listed companies” is going to put a lot of pressure on the Listed Stocks. Time to not be in any Chinese ETFs or funds, IMHO. This has the potential to uncover a LOT of overpriced Property Bubble “assets” are not worth much, and that the Property Bubble is huge and headed for a giant POP!
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And it looks like there’s going to be a little “spill over” into the USA, though I think most USA money managers will have left China a while ago. It also does look like there is already a run started / bankruptcy issues with others in the Chinese market.
Well, I guess there are 2 big questions.
1) How far and how rapidly will this collapse spread through the Chinese economy?
2) How much will it leak outside of China?
I expect #1 to be a race condition between The People figuring out they need to exit pronto with as much of their money as they can, and The Government trying to prevent that, prop things up, and cover up the rot. I would put a bet on “collapse”…
I expect #2 to be mostly limited to Ethnic Chinese communities scattered around the world and to a few companies that made the mistake of putting big bets in China (Probably more in Latin America, Africa, and Asia than here. Places with weaker regulatory frameworks and where folks have been less talking up a war over Taiwan…)
Me? A spread of Gold, Silver, $US, Swiss Franc, £ Stirling, and S&P 500 (though on the cusp of covering the S&P 500 if this latest pull back starts to look more like a hard top). Oh, and some TIPS. US Treasury Inflation Protected Securities. Basically bonds with an inflation rider. Yes, highly conservative and with “insurances” spread between banks (FDIC), brokers (SIPC), and private (my broker carries private insurance too) and a chunk in a Credit Union (NCUA).
So all under any limits of insurance coverage and different agencies…
What, me worried? (Uh, yeah…)
Oh, and no debt at all. Everything owned clear (house, cars, boat, etc.) Don’t even use credit cards. So kind of “Belt, Suspenders, overcoat, mukluks, gun belt, gas mask, umbrella”…
I don’t expect the China problems to do too much in the USA or Europe, but we have our own problems with excess debt on the government books.
Musings from the Chiefio 
Similar to those USA banks that went bust nearly a year ago. Buying investments that dropped suddenly in price; in their case USA low interest rate bonds which dropped in value when interest rates rose.
Zhongzhi was heavily into housing and industrial buildings and reputedly bought up some loans from Evergrande at low value, but not enough. With the recession (or depression?) in China they weren’t getting anybody to buy those units. And I doubt that the government wants to bail them out, causing more uneasiness in the Chinese building game.
With the problems already known internally the missing executives have either
1. Got out of China with their money
2. Got out of China without money
3. Haven’t got away.
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@Graeme No.3:
I’d make #3 as “In hiding in China.”… and maybe “trying to get away”.
The difference here, compared to the Silicon Valley Banks is important.
First and most important, there is NO insurance behind the deposits in this unregulated Shadow Bank; so the panic will ramp higher and faster.
The scale is much larger. Most investments are not available to the people inside China, but property via Shadow Banks was. So there’s a LOT more people being hurt by this and a LOT more money in the Risky Assets pile. When this goes sideways (and it already is) it will go a lot further.
Will it get bad enough for Xi to force some kind of bailout or rescue (of his own position…) to mollify folks and not get a Palace Coup? Don’t know… But somebody’s heads will roll…
This is like watching a train crash…from a crashing train.
Rhoda,
Did you see this?: https://en.wikipedia.org/wiki/Runaway_Train_(film)
The people of China have had to put up with much hardship.
Looks like it is going to get worse.
The dominoes might start falling if China decides to plug the gap by cashing-in some (or more) of their US-based assets.
A substantial part of the Chinese economy is still run by the CPC, and they can impose solutions that our Federal Reserve can’t. Moreover, the CPC has been trying to move investment from housing to manufacturing. We’ll have to see how it all plays out.
As to the Chinese people suffering, you’re not paying attention. Deng’s reforms of 1978 unleashed a tidal wave of economic growth. Over some 30 plus years, 800 million Chinese were moved from Asian level poverty to Western European standards of living, or better. No Chinese city has the poverty or filth that all our major cities have. Moreover, at the last CPC convention, the Party committed to raising up the remaining 600 million Chinese.
As to China’s US T-bills, they have been selling them off for several years now, and their holdings are greatly reduced.
People keep talking about how bad it is in Russia and China, while the US is in free fall, politically, economically, militarily, and culturally. Half of our population expects (wants?) a civil war.
@Keith:
IMHO, the dominoes are already starting to fall… they just fall slowly ;-) Especially at the start. So it is going to take a while for the AwShits to work their way through the various systems to an exponential fall rate increase.
We’re already in an exponential increase in US Debt (added $1 TRILLION in the last QUARTER) and an exponential exodus from the US Hegemony & payment systems (BRICS+ expansion along with their swap to trading in national currencies along with Russian Sanctions moving $Billions into that system and out of Europe & $US currency volume). Oh, and China is already moving out of $US Debt at the “best rate” they can do without tanking the $US.
The only really big question IMHO is “what is best for me to do?”. I’m basically moving as much as I can into “inflation safer” instruments at the “best rate” I can. I’m not moving fast enough (IMO) but you do what you can inside the limits you have.
Unfortunately, the options available are not that great…
Real Estate has a high “cost of ownership” (about 2% to 4% / year between taxes and maintenance / insurance…) so only pays off big with inflation over that or lots of tax advantages (write off “depreciation” on an appreciating asset…). Management of rental properties is a PITA (been there done that) and REITS are subject to redemption risks (other folks panic out and the REIT must sell properties at bad timing) yet the Management Costs are still there, just hidden inside the trust.
Gold & Silver: Volatile commodity prices, sterile asset that does not grow, physical storage risks. Note that gold has ranged from about $300 / oz to $2400 / oz largely just due to Central Bank decisions to sell / buy. That’s volatile. IF you buy it in a “fund”, there are risks of fund management, forced redemptions, etc.
Don’t even talk to me about “Art & Collectibles”…
TIPS have “lying about real inflation rate” risks to the inflation insurance adjustment.
Forex: Moving into other currencies. Country and local economy risks.
So it goes…
But you do what you can. I’m spread over “all of the above” (except for “art & collectibles) in various amounts.
In Theory, the best strategy would have been to get a low fixed interest rate loan on the house and then let it inflate away; but I was more interested in “rig for rough seas” than in optimal “rate to goal”. So bought the house / real estate “clear”. Since we live in it, the “property taxes” are just the cost to have a house to live in.
I’m lagging in buying physical gold or silver (my lazy…) so I’m taking fund risks. The price for not having physical storage issues & risks. Plus, these are both commodities with markets dominated by large players and small volumes so volatile prices.
Also taking fund risks on currencies. Plus, just which currency is “better” is a bit of a muddle. Not the Yuan since it is Central Committee controlled. Not the Ruble due to US / EU political spite risks. The Euro? Um, Germany economy imploding so whole of EU in doubt; plus the whole WEF alignment risks. Canada? Don’t make me laugh – Justin, really? Australia (one of my prior favorites), not with it being reduced to a Glow Bull Waming resource / commodity supplier to China. Don’t get me started on African or South American currencies… Even the Swiss have been bludgeoned into submission to the USA Intrusive State. So I’ve got about even amounts of Swiss Franc (betting on continued discipline even if being abused by the USA) and British Pounds (betting that BREXIT showed some amount of “head on straight” and courage remaining in the Brits; plus not in the EU / Euro Zone so dodging those issues). I could go on, but I won’t. It isn’t optimal, but hoping for good enough…
For TIPS, I know I’ll not get real inflation adjustments, but guessing that the “rate of lying” will be about the same as the “payout on interest rates”…
Still to do? Work the “strips” or “zero coupon” angle. Back in the ’80s I bought a ladder of strips when interest rates were about 15% and falling. Turned a few thousand into about $40,000 over the following years just by waiting. So need to watch the Fed and figure out when they will start cutting. But first need to know that they have raised all they are going to do… So you can swap in / out based on the inflection points in The Fed “problem solving” inflections.
Essentially moving to an “active compensation and adjustment” model of actions, but still doing it too slowly…
Maybe I ought to write this up as a generalized “how to deal with inflation risks” posting…
@Bob Sykes:
Absolutely! Same thing in Russia as in China. Putin is loved by the people of Russia because he moved them from USSR oppression & poverty to European / US levels of prosperity and modernity. Much like the CCP did in China (but from different starting points and contexts). Part of why I like to watch Baklykov Live as he walks Russian Cities live. You get to see for yourself that they are modern, clean, and prosperous. Anyone who sees that knows that our Rulers are out of touch when they think sanctions will cause the Russian People to turn on Putin. They know it is The West screwing with them and that it is Putin who is keeping them isolated from the abuse.
Similarly, in China, so many folks gained so much, and those that didn’t gain (yet) are hoping for their share (not looking to overturn the system). Yet China has “quality control” issues along with major mal-investment issues to overcome. So I do expect some degree of “implosion” but limited to a couple of sectors at most, and focused into selected companies. IMHO a lot will hang on 2 things for China.
1) Will their demographic problem (not enough children and too few women) cause a crisis in their economy?
2) How much of the Real Estate Collapse will leak outside of that sector and just which companies?
There ought to be a minor 3rd of “how will the exodus of Western Companies” impact things? (Prepping for Taiwan war issues) But I expect adding Russia will offset anything from The West backing off.
So I see China as having a lot of risks and issues; but the Chinese People isn’t one of them; nor do I think “total economic collapse” is one either. To the extent The West is on the rocks and not buying / investing “going forward”; Russia is there as a giant New Market / opportunities; and then they have all that leverage of involvement in Africa and South America… So overall and over a decade+ time frame, I think they are in a good position; except for all the mal-investment in quasi-fraudulent realestate. That might implode, or it might be “managed” well enough by the CPP managers. TBD.
The dominoes I see falling are mostly in The West. EU & USA. For the EU it is the loss of German Growth & Profit from cutting off their access to Russian resources and thus killing their profit center. For the USA it is the Debt Monster & destruction of the real economy by sending it to China…
Do not think about Australia at present. It has idiots in governments at Federal level and all the states. Qld may change at the election in May 24 and the Federal level Aug next year but still a mess in NSW, SA, Victoria & WA. So called climate change & net zero is the main problem followed by a ban on nuclear and in NSW and Victoria a ban on natural gas exploration. Industry is shutting down because of higher power prices, lack of gas & coal energy and union problems.
Vietnam seems in a growth phase. It has reach over 1000kg/capita cement production (with top technology) which is a lead indicator of GDP/capita growth. It is starting to make cars and trucks. It has plenty of coal and possibly oil &gas.
Indonesia has high growth in cement but is a long way from getting to 800kg/capita. They have lots of coal with exports to China, India and Japan. They have natural gas and some oil. They have plans to build nuclear power in Kalimantan not far from their new capital. They have the fourth highest population which is growing and will overtake USA.
Cementafriend
Re NSW
“‘Woke culture’: NSW govt calendar celebrates ‘every group imaginable’ ”
@Cementafriend
Re Vietnam – “It has plenty of coal and possibly oil & gas.”
Definitely oil and gas, and lots of it, most of it as reserves. That’s part of the forgotten history of Vietnam, from 1945 to the start of US-involvement. It was the era of the French oil exploration (Total Oil) in Vietnam, who wanted control, but lost it before US-involvement.
https://www.worldometers.info/oil/vietnam-oil/