China Investigates Major Shadow Bank Amidst Financial Turmoil

Chinese authorities have launched an investigation into Zhongzhi Enterprise Group (ZEG), one of the country’s largest shadow banks, which has provided substantial loans to real estate firms. ZEG’s asset management arm, at its peak, managed over a trillion yuan ($139 billion), and officials are now probing “suspected illegal crimes” related to the firm following recent reports of its insolvency.

Days ago, ZEG declared insolvency in a letter to investors, revealing liabilities of up to $64 billion, surpassing its estimated assets of about $38 billion. While authorities have taken “criminal coercive measures” against “many suspects,” the identities and roles of these individuals within the firm remain unclear. The company’s founder, Xie Zhikun, passed away in 2021.

As a significant player in China’s shadow banking industry, ZEG operates outside traditional regulated banking, providing crucial financial support to the country’s property sector. China’s shadow banking industry, valued at around $3 trillion, faces challenges due to a severe credit crunch, with major firms teetering on the brink of financial collapse.

Andrew Collier, a shadow banking expert at Orient Capital Research, notes that China’s pursuit of a property bubble fueled by capital from individual investors offering high returns has contributed to the industry’s challenges. The informal lending practices, which gained momentum after the 2008 global financial crisis, are facing increased scrutiny amid a slowing economy and a real estate crisis.

The financial troubles at ZEG raise concerns about broader implications for China’s economy, particularly in the aftermath of Evergrande’s collapse and the recent financial issues at Country Garden. With China’s property sector constituting a third of its economic output, including construction materials and related industries, the latest developments add to worries about economic stability. China’s economic growth slowed to 4.9% in the three months ending September, down from 6.3% in the previous quarter, reflecting the challenges faced by the country’s financial sector.