China’s troubled shadow bank Zhongzhi warns of insolvency

afr.com:

One of China’s largest shadow banks warned it’s “severely insolvent”, with a debt pile more than two times higher than assets, according to a letter seen by Bloomberg News.

In a further sign of trouble for the nation’s $US3 trillion ($4.6 trillion) trust sector, Zhongzhi Enterprise Group told investors on Wednesday that it has debts of about 420 billion yuan to 460 billion yuan, compared with assets of 200 billion yuan. Liquidity has dried up and the recoverable amount from asset disposals is expected to be low, the company said.

Shadow banks like Zhongzhi are loosely regulated firms that pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. Bloomberg

“Preliminary due diligence shows the group has endured a significant risk of sustainable business operation and the company doesn’t have sufficient assets to cover debt in the short term,” the firm said in the letter sent to investors. Previous efforts at a “self-rescue” failed to live up to expectations, according to the letter.

Zhongzhi, one of the country’s largest private wealth managers, is the latest financial giant to run into trouble amid a housing crisis and sluggish growth in the world’s second-largest economy. The manager of more than 1 trillion yuan in assets was thrust into the spotlight in August after one of its trust-company affiliates failed to make payments to customers on high-yield investment products.

The company didn’t respond to a request seeking comment.

The group has hired KPMG LLP to conduct an audit of its balance sheet for a potential debt restructuring, Bloomberg reported earlier. Meanwhile, its trust unit got help from two of the nation’s biggest financial firms to maintain business operations and