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Zhongzhi & Zhongrong Trust: Market Implications
Zerlina Zeng, CFA – Senior Analyst - North Asia Corporates
Karen Wu, CFA – Analyst - Asia-Pacific Banks
EXECUTIVE SUMMARY
- Zhongrong International Trust, a top 10 trust company in China missed payments on its trust products; it is managed and partially owned by Zhongzhi Enterprise, which has defaulted on RMB 230 bn of payments to ~150K high-net-worth investors, according to media reports.
- We think that financial irregularities, including the usage of non-standard investment products, corporate governance, the ongoing property sector defaults and the macro downturn are the key reasons for the default.
- At a first glance, the reported Zhongrong Trust defaults do not appear to be of systemic concern; however, the defaults could continue to hurt investor and market sentiment, and a disorderly winding-up of any large trust or wealth management company could test near-term China’s financial stability.
THE CURRENT STATUS
Zhongrong International Trust (“Zhongrong Trust’), a top 10 trust company in China, missed payments on its trust products, according to statements by a few A-share listed companies, including KBC Corp (688598 CH) and Nacity Property Service (603506 CH). As of FY22, Zhongrong Trust had 1,633 trust schemes under management, totaling RMB 629 bn or 3% of the total trust AUM in China. Zhongrong Trust’s largest shareholder (37.47%), Jinwei Textile Machinery, is a subsidiary of China National Machinery Industry Corporation (Sionomach), a central SOE. However, its business operations and board are de facto controlled by the second largest shareholder (32.986%), Zhongzhi Enterprise (“Zhongzhi”), one of the largest privately held financial conglomerates in China with stakes in four wealth management companies, five asset management companies, and six licensed financial institutions. According to a media report, Zhongzhi, which has an AUM of over RMB 1 tn, faces a liquidity crisis as its wealth management platforms have defaulted on RMB 230 bn of payments to ~150K HNW (high net worth) investors. It was also reported that Zhongrong Trust has missed payment on at least 30 products. While the defaults have been widely reported from earlier this year, Zhongzhi has evidently been facing liquidity issues since the company’s founder died in late 2021.
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