Despite government intervention, China’s real estate crisis worsened as shadow bank Zhongzhi Enterprise Group declared bankruptcy on January 5. The bank, which has financed the operations of several Chinese real estate developers over the years, said in August 2023 that it was facing a liquidity crunch as several real estate companies defaulted on their debt and interest payment obligations.
Huge responsibilities
Zhongzhi valued its total liabilities at 420 billion to 460 billion yuan (about $59 billion to $65 billion) in late November. Meanwhile, its tangible assets amounted to only 200 billion yuan (US$28.2 billion). This indicates a deficit of about $36.4 billion for the bank.
The shadow bank, which managed more than $140 billion in total assets at its peak, cited an inability to settle outstanding debts due to insufficient assets to cover all liabilities while filing for bankruptcy with the No. 1 Intermediate People’s Court in Beijing.
Zhongzhi Enterprise first raised alarms in August last year when a subsidiary of a trust company failed to meet payments on high-yield investment products, contributing to President Xi Jinping’s financial woes amid the real estate crisis and economic challenges.
The company also attributed the collapse of its internal management to the death of founder Xie Zhikun and the departure of key executives, noting that previous attempts at “self-rescue” had fallen short of expectations, as described in a letter dated November 22.
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Government intervention
Chinese officials announced they were launching criminal investigations into Zhongzhi Enterprise Group’s financial operations on November 25, just days after the troubled shadow bank reported a deficit of more than $36 billion on its balance sheet.
In a WeChat statement, Beijing police announced the implementation of “mandatory criminal proceedings” against several suspects, including Zhongzhi Enterprise’s founder, Xie. When Shih died in 2021, some of his relatives held executive positions within the company.
Wider implications
In 2021, China’s real estate sales reached 18.2 trillion yuan ($2.5 trillion), making it one of the largest contributors to GDP. Nearly 24% of China’s GDP comes from real estate, making it a major driver behind the country’s economic growth. However, since 2020, the debt crisis has affected China’s real estate market, affecting major players such as China Evergrande Group and Country Garden. The decline in home sales has contributed significantly to the drying up of its cash flows.
Headwinds related to the pandemic and other factors caused China’s real estate sales to decline 27% to 4.9 trillion yuan in 2022. Sales are expected to decline further by 1.8 trillion yuan in 2023. Total output from the real estate sector fell by 340 billion yuan in 2022. By 51 billion yuan in the first nine months of 2023.
As the real estate crisis intensifies, more real estate developers and shadow banks are expected to face liquidity problems.
“It is still too early to call the bottom,” said Lu Ting, chief economist at Nomura Holdings. “We see a material risk of another downturn in the economy led by the still stagnant real estate sector.”
Standard & Poor’s Ratings expects China’s economic output to return to 2015 levels in a worst-case scenario, as real estate sales could fall to nearly 10 trillion yuan.
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This article Shockwaves in the East: Zhongzi’s bankruptcy exposes China’s deepening real estate crisis Originally appeared on Benzinga.com
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