Chinese Shadow Bank Announces Insolvency, Government Announces Investigation

(AP Photo/Alexander F. Yuan)

The big concern about the failure of Chinese real estate titans Evergrande Group and Country Garden was that their financial collapse would spread into the rest of the economy. Specifically, the concern was that so-called shadow banks, which were involved in many of these property deals, would be impacted. And sure enough last week a major shadow bank called Zhongzhi Enterprise Group sent a letter to investors announcing it was insolvent.


China’s Zhongzhi Enterprise Group, a leading wealth manager, told investors it is heavily insolvent with up to $64 billion in liabilities, threatening to reignite concerns that the country’s property debt crisis is spilling over into the broader financial sector.

The firm, which has sizable exposure to China’s real estate sector, apologised to its investors in a letter that said it had total liabilities of about 420 billion yuan ($58 billion) to 460 billion yuan ($64 billion)…

“Initial inspections show that the group is seriously insolvent and has significant continuing operational risks. The resources available for debt repayment in the short term are much lower than the group’s overall debt scale,” it said.

“The Zhongzhi group deeply apologises for the losses caused to investors. We fully understand the urgency, importance and seriousness of resolving this overall risk,” the group said in the letter.

Now that the cat is out of the bag, the Chinese government is leaping into action to investigate.

Beijing police have begun a probe into the wealth management unit of Zhongzhi Enterprise Group, the authorities said over the weekend. The announcement comes just days after the company told investors that it is “severely insolvent.”

According to a statement posted on Saturday, police suspect Zhongzhi of “illegal crimes” and have enforced “mandatory criminal measures” against a number of suspects, including one surnamed Xie. The founder of the group, Xie Zhikun, died of a heart attack in December 2021, but his nephews hold key posts in the group, according to Chinese state media.

“Investors are requested to actively cooperate with the police in investigating and collecting evidence,” the police said, without elaborating on the crimes or the measures.


Zhongzhi has been part of these shady real estate deals, in which companies use current sales to fund previously paid for apartments, for years. The government is only investigating now because it helps insulate the Xi dictatorship from public anger. They’ll throw the founder’s nephews in prison to prove they are on the side of the people, but what they really care about is protecting their own power and that means putting an end to protests before they begin.

Despite the efforts of the Chinese Communist Party (CCP), Freedom House’s China Dissent Monitor project tallied 1,777 demonstrations linked to the property sector between June 2022 and October 2023.

Two-thirds of these events involved homebuyers and homeowners raising issues like project delays, contract violations, alleged fraud and shoddy workmanship. Most of the remaining demonstrations were initiated by construction workers demanding unpaid wages…

As information and ideas circulate, the demonstrators can appear to be on the verge of forming a decentralized movement. The CCP, though, is obsessed with preventing organized dissent and suppressing grassroots movements, an undertaking it euphemistically calls “social stability management.”…

The party-state’s policy options for responding to the current wave of housing protests are not so clear, not least because the problem has been long in the making. For decades, the CCP facilitated rapid property development to generate revenue for local governments. This incentivized real estate companies to overborrow and encouraged citizens to put their savings into property.


Whatever happens to Zhongzhi and other shadow banks will just be a public performance designed to convince people the government is doing something about this disaster which it helped to create in the first place.

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