Chinese underground bank dumping debt: Investors could lose up to 56 billion USD

Amid China’s shadow banking giant Zhongzhi Enterprise Group Co. Faced with a criminal investigation, lawyers and analysts began assessing the damage to investors. One estimate is that investors in this case could lose up to about 56 billion USD.

Bloomberg news agency quoted a scenario presented by lawyer Ying Yue at Leaqual Law Firm in Shanghai, saying that more than three-quarters of the money investors poured into Zhongzhi will not be able to get it back. Only about 100 billion yuan of assets – equivalent to 14 billion USD – of the total debt of 460 billion yuan are recoverable. Based on experience, Mr. Ying predicts that the case handling process in court will be slow and lengthy.

According to Mr. Sun Jianbo, founder of Beijing-based asset management company China Vision Capital, bad assets are often sold at a 70% discount. That means investors can only get back 13% of the money they poured into Zhongzhi, according to Bloomberg calculations.

Last weekend, Chinese authorities said they had opened a criminal investigation into Zhongzhi’s asset management department. This move comes just days after the company warned of serious liquidity loss and a $36.4 billion shortfall in its balance sheet.

The case is a wake-up call for wealthy Chinese investors seeking high returns in investment products offered by loosely regulated financial institutions like Zhongzhi. Concerns about Zhongzhi began to emerge in August this year, after one of the subsidiaries failed to make payments on high-yield investment products.

According to Mr. Ying, Zhongzhi’s remaining 200 billion yuan of assets, if sold, can only bring a maximum of about 100 billion yuan to pay investors as mentioned above. Thus, investors only get back about 23% of the money poured into this company, if calculated according to the average of the total debt of 420-460 billion yuan that Zhongzhi announced.

The actual percentage of debt recovered may be much lower. Last week, Zhongzhi said the company’s liquidity had dried up and the recoverable amount was expected to be low.

Mr. Ying noted that the investment recovery rate in similar cases was much lower than 23%. A criminal case with an amount of about 30 billion yuan is still waiting for a second trial even though four years have passed since the incident broke out – Mr. Ying said, commenting that the procedures The legal proceedings in the Zhongzhi case will be much slower because the amount of money involved is huge.

Shadow banks like Zhongzhi often attract people’s deposits and then provide loans and investments in real estate, stocks, bonds and basic commodities. In recent years, as Zhongzhi’s rivals have cut risk, the company and its subsidiaries – most notably Zhongrong International Trust Co. – continues to provide loans to real estate businesses in difficulty and acquire assets of companies such as China Evergrande Group – a real estate “giant” that has defaulted, gone bankrupt and is facing danger. The body must dissolve.

Founded in 1995 and headquartered in Beijing, Zhongzhi has grown into a “huge” financial company with more than 1 trillion yuan in assets at its peak. Zhongzhi has 6 member enterprises that are licensed financial companies, including trust company Zhongrong International Trust and 5 asset management companies, and 4 estate management companies – according to data from the company website. Zhongzhi also holds controlling stakes in many listed businesses across sectors from semiconductor components to health care and consumption.

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