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

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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.

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A residential complex being built by the troubled developer Country Garden, in Nantong, China. Zhongzhi’s problems are the latest ripple effects from the country’s property crisis.Credit…Qilai Shen for The New York Times

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.”

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Protesters outside Zhongrong offices in Beijing in August.Credit…Video Obtained by Reuters

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Police officers at the Zhongrong protest.Credit…Video Obtained by Reuters

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.

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Chinese trust firms like Zhongrong manage $3 trillion in assets.Credit…Greg Baker/Agence France-Presse — Getty Images

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.”

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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B.C. voters face atmospheric river with heavy rain, high winds on election day

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VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.

Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.

The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.

Wednesday was the last day for advance voting, which started on Oct. 10.

More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.

Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.

An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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No shortage when it comes to B.C. housing policies, as Eby, Rustad offer clear choice

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British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.

David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.

But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.

“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.

Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.

But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.

Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.

Yet a host of other factors are at play, rates in particular, Yan said.

“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.

Rustad, meanwhile, is running on a “deregulation” platform.

He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.

Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.

Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.

If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.

“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.

Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.

“Who do you believe will deliver a better tomorrow?”

Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.

The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”

IS HOUSING THE ‘GOVERNMENT’S JOB’?

Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.

“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.

Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.

“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”

The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.

The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.

Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.

They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.

Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.

Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.

Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.

“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.

The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.

The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.

At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”

A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.

Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.

“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.

Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.

“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.

Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.

Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.

The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.

A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.

Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”

The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.

Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”

Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.

Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.

“It diminishes us as a society, but then also as an economy.”

This report by The Canadian Press was first published Oct. 17, 2024.

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