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Zhongzhi office in Beijing: liabilities of more than 50 billion euros


The Chinese real estate industry has been in a severe crisis for some time because demand on the housing market has declined. Now the financial sector of the world's second-largest economy could also face the fate of Evergrande and Co. threaten.

At least with the Chinese financial conglomerate Zhongzhi, a major player in the country's shadow financial market has now stumbled – and is considered insolvent. In a letter to investors, the company apologized and cited liabilities ranging from 420 billion yuan (53.40 billion euros) to 460 billion yuan (58.49 billion euros). These would be offset by assets of 200 billion yuan.

"The funds available for short-term debt repayment are significantly less than the group's total debt," it said. "Zhongzhi Group deeply apologizes for the losses incurred by investors." Zhongzhi did not immediately comment further on the letter.

Are the tax authorities intervening?

Asset managers operating in the shadow banking sector often operate outside the regulatory framework that applies to commercial banks. They often funnel the funds from their investment products to real estate developers and other industries, it is worth a total of three trillion dollars.

"Financial regulators will almost certainly intervene aggressively if there are signs that Zhongzhi's problems are spreading," said Christopher Beddor, an analyst at Gavekal Dragonomics. The chances that investors will get their funds back in full are minimal.

Already in the summer, there had been increasing indications that Zhongzhi was in greater trouble. The trust fund provider Zhongrong, which is controlled by the group, had missed the deadlines for payments on dozens of investment products. In recent years, Zhongzhi had downsized somewhat and sold shares in listed companies as the group came under pressure in the wake of China's tougher crackdown on shadow banks and the downturn in the real estate market.

Zhongzhi had started out as a timber and land trader in the 1990s, but quickly expanded into other industries from chip to mining. Above all, however, Zhongzhi is active in the financial sector: In addition to Zhongrong, which has run into difficulties, other fund companies and asset managers belong to the empire.