Real Estate Crisis Triggers New Alarms Over China’s Shadow Banks

An accountant in northeast China deposited her life savings and received a letter guaranteeing her investment in a trust firm. Workers at a state-owned utility pooled money from friends and relatives believing that their investments were backed by the government. A man sank $140,000 into an account that he was told would make a 10.1 percent annual return.

They are among the hundreds of thousands of Chinese investors confronting a distressing reality: Their investments with Zhongzhi Enterprise Group, a financial giant managing $140 billion in assets, and its trust banking arm, Zhongrong, might be at risk. Starting in July, companies affiliated with Zhongzhi missed dozens of payments to investors. They have offered no timetable for when people will be paid, fueling concerns that one of China’s largest so-called shadow banks may be near collapse.

In a brief statement last week, Zhongrong said some investment products were “unable to be paid on schedule” because of “multiple internal and external factors.” It did not mention whether investors would get their money. Zhongzhi has not made any public statements about its finances, and it did not respond to an email seeking comment.

Zhongzhi’s problems are the latest ripple effects from China’s property crisis, which is wreaking havoc in the country’s financial system and piling pressure on a central government navigating a troubling economic slump. They have ignited new fears about China’s shadow banks — financial firms that offer lending and investment services but are not subject to the same regulations as conventional banks. These firms doled out credit to property developers for the country’s construction boom, and now many borrowers are defaulting on loans as new home sales have stagnated.

Trust firms like Zhongrong are an arm of the shadow banks that sell investment products to Chinese companies and wealthy individuals. They face few requirements to publicly disclose information about their operations, including how they invest client money. And they are gigantic: Trust firms manage $3 trillion in assets, enticing investors with high-yield financial products that many investors believed were backstopped by the government. The trusts extend loans or invest in assets such as real estate, stocks and bonds — money that keeps China’s economy and markets moving.

Zhongzhi is a privately owned conglomerate with businesses that span venture capital, asset management and insurance. One of its crown jewels is a 33 percent stake in Zhongrong International Trust, which held $86 billion in investments in 2022.

Zhongrong’s statement, issued after weeks of silence, said it had brought in two state-owned companies for support, deepening the intrigue about Beijing’s thinking. For decades, China has bailed out indebted financial firms, leading many to believe that the products offered by trusts — especially ones with ties to state-owned enterprises — were essentially guaranteed by the government.

But this safety net, critics argued, created a moral hazard that allowed investors to ignore the risks associated with high-yield investments, while encouraging trust firms to engage in the type of risky lending that Beijing has been looking to curb.

In a message to investors last week, an employee of Datang Wealth Management, a company controlled by Zhongzhi that sells Zhongrong products, perpetuated the idea that the government would not abandon them.

“Our trust contracts are all true and valid,” the employee wrote in a message shared with The New York Times. “And it is a leading trust company with a central-government-owned enterprise background, so our payment problem will definitely be solved, and the result will not disappoint.”

Zhongrong’s biggest investor is Jingwei Textile Machinery, a state-owned enterprise, while Datang shares the name of its minority shareholder, Datang International Power Generation, a state-owned utility. Last month, Jingwei announced that it was pulling its shares off the stock market, citing “significant uncertainties” without mentioning Zhongrong.

The accountant in northeast China said she had invested $1.5 million into two Zhongrong trust products. While she knew little about Zhongrong, she felt safe because its largest shareholder is a state-owned firm and it had a license from China’s banking regulator. She said she had received a commitment letter promising to make up any shortfall in her investment.

But when her $550,000 investment into one of the funds matured last month, she did not receive her principal or her 7.6 percent interest after a year. She said the company would not reassure her that she would be paid. After she visited a local financial regulator to lodge a complaint, a police officer warned her not to appeal to a higher authority. She asked to be identified only by her surname, Ms. Wang, for fear of further reprisals.

“It’s like my heart is bleeding every day,” Ms. Wang said, sobbing on the phone. She had planned to buy a home for her child in Beijing with the money she had invested.

After Zhongrong missed its payments, angry investors gathered outside its Beijing headquarters, demanding that the company “pay back the money.”

While Ms. Wang and other investors are desperate for government intervention, Beijing might be reluctant to engineer a bailout.

Around 2016, China started trying to defuse the risk posed by its growing debt. Regulators limited banks from funneling funds into trust firms to circumvent rules preventing risky lending. In 2020, it limited debt-laden property developers from borrowing more.

China’s policymakers now face a predicament. They could stay the course, risking social stability from the economic fallout. Or they could bail out firms to prop up the economy but undermine the message that risky behavior has consequences.

In 2020, regulators took over Xinhua Trust and New Era Trust — two of China’s 68 licensed trust firms at the time — for what it called “illegal business operations.” Three years later, Xinhua became the first trust firm to declare bankruptcy in over 20 years.

Logan Wright, director of China markets research at Rhodium Group, said China used to embrace bailouts, because faith in a government backstop allowed credit to flow for a fast-growing economy. But as China’s debts ballooned, the government changed course.

“That strategy is now coming to an end,” he said.

But it was the veneer of government support that reassured nearly 1,000 employees at a power plant in eastern China to invest with Datang Wealth Management for products offered by Zhongrong and Zhongzhi. The sales pitch came from a finance official in their state-owned company, and the workers understood that Zhongrong and Datang had the partial backing of state-owned firms, according to a person who had permission to speak on behalf of some employees. The plant employees were worried about the consequences of speaking out.

In many cases, employees combined money from relatives and friends to invest in products offering annual returns of up to 10 percent, this person said.

In late July, the investors were told that redemptions were delayed but that “everyone’s principal won’t be affected,” according to a screenshot of a WeChat message.

Zhongzhi told investors two weeks later that it was conducting “asset liquidation and capital verification” and delaying redemptions.

As time passed without payment, the company colleague who served as a Datang intermediary warned employees not to complain or they might be moved to the back of the line for redemptions.

But some investors are refusing to stay quiet.

Zhou Chunlei, who had invested $140,000 with a Zhongzhi subsidiary, was supposed to receive his first interest payment in July. When he didn’t receive the money, he took the rare step of speaking out by his real identity on Chinese social media.

“Rather than waiting, it is better to fight for our personal interests,” Mr. Zhou said in a video. “I also hope that the government can solve the problems for the people and the investors.”