Zhongzhi bankruptcy amplify contagion risks of non-bank wealth management products: analyst

Shadow bank Zhongzhi filed for bankruptcy in January 2024.

Chinese wealth manager Zhongzhi’s bankruptcy is highlighting the contagion risks associated with non-bank wealth management products– especially with their connection to the country’s embattled property developers.

In early January, shadow bank and wealth manager Zhongzhi Enterprise Group filed for bankruptcy. The move comes after months of turmoil: in November 2023, Zhongzhi reportedly told investors that it has liabilities of over $60b, about double its assets at the time, according to media reports.

The contagion risk of Zhongzhi’s bankruptcy filing is not only about trust companies but wealth management products, says Natixis’ APAC chief economist Alicia Garcia Herrero. 

“The domino effect of China's shrinking real estate sector is not a new story. However, investors and regulators are usually in extra high alert mode when it is related to the financial sector for a vital reason – the contagion risk. Zhongzhi is a good example due to two dangerous sets of linkages in trust companies and wealth management products (WMPs),” Garcia Herrero noted in a report.

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Garcia Herrero particularly expressed the possible lack of regulation for WMPs issued by non-bank firms.

“What worries us more is the potentially large amount of WMPs issued through private placement notes and financial asset exchanges, which can be loosely regulated,” she noted.

Unlike the formal issuance by commercial banks, some entities may reportedly take advantage of the easy approval process to set up "camouflaged financial asset exchanges", which may not even be properly licensed. That said, some non-bank entities can fly below the radar and raise capital without proper disclosure to investors and risk management, she added.

“This is Zhongzhi’s case, and the size of the problem remains unknown on the industry level as the data is incomplete,” Garcia Herrero warned.

All in all, Zhongzhi's bankruptcy filing points to the rippling effect of real estate and some failures in the shadow banking sector, Natixis noted.

“Although trust companies have reduced their exposure to real estate, the uncharted waters of wealth management products by non-bank entities can pose more credit risks,” Garcia Herrero said.