According to legal and company filings, the Chinese shadow bank that is at the center of concern over missed payments has loaned money to several of the struggling property developers in the country.
Zhongrong is a shadow finance giant in China, with a $3tn industry. Its connections to property developers has fueled fears about spillover effects of a slowdown of the real estate market, which represents more than 25% of China’s economy.
The Covid-19 pandemic has exacerbated concerns over the health of China’s economy.
Zhongrong, as well as other shadow banks within the so-called trust sector, sell high-yielding savings products to companies and retail investors. The savings are then lent to various companies in China, such as property developers.
The company says that 11 percent of Zhongrong’s assets are in the real estate sector. However, it doesn’t provide any information about its specific investments and the data in the industry is often lacking.
Zhongrong didn’t disclose its missed payment, but they were made public by companies listed on the stock exchange.
The FT examined legal filings for 2022 and 2023. Zhongrong had filed more than Rmb8.7bn in claims against Sunac. Sunac was formerly China’s biggest developer, but defaulted on its debts in 2022. Sunac agreed to a debt restructuring plan offshore in March. Zhongrong and Sunac may have reached a settlement, but it is not clear what that settlement was.
Zhongrong has delayed payment on two products that were due to be paid in March 2021 or April 2022. This was revealed in an April disclosure by textile chemicals company Zhejiang Juhua. According to reports in state media, the products were linked to real estate developments by China Fortune Land Development (CFLD) and Sunac.
According to China Fortune Land Development’s filing, Zhongrong loaned money to China Fortune Land Development in December 2020. The money was in the form a Rmb1.5bn permanent bond. Two months later, the company, which is one of China’s leading developers, defaulted in its international debts.
Zhongrong also lent Yango an unspecified sum, a major developer who defaulted on its loan in 2022. According to Yango’s filing from June of last year, the Rmb3.3bn was repaid when the project that was related to the loan sold.
According to the 2022 bond report for Evergrande, Zhongrong filed a lawsuit against Evergrande in May 2022 over a dispute of 1.9bn. Zhongrong’s exposure to Evergrande is not clear. Evergrande is the most indebted of all developers. The property group announced last month that it was facing more than 2,000 lawsuits with a value of 30mn and more.
Beijing is concerned about the high debts of at least one local authority. In a July filing, a government investment fund from the city of Xi’an stated that it had been delaying repayment of a 900m to Zhongrong due to “land development”.
According to the 2022 annual report, Zhongrong’s total assets are 629bn. It is the largest trust company to have more than 10% of its total exposure in real estate.
Zhongrong admitted in a Friday statement that it was unable to pay for some of its goods on time. It said it entered into an arrangement with the state-backed Citic Trust Trust and China Construction Bank Trust under which both would provide Zhongrong “entrusted Management Services”.
According to the China Trustee Association, the total trust industry in China includes 68 companies with assets totaling Rmb21tn. Direct exposure to real estate was 1.1tn at the end of the first quarter this year.
The data does not include local government financing vehicles. The data show that the exposure of trust companies to bonds has tripled since mid 2020.
One analyst who covered the property sector said, “There is no breakdown as to how much of the bond’s [proceeds] has been invested in this sector.” The real exposure may be greater than you think.
Zhongrong did not reply to comments from Zhejiang, Sunac and Evergrande. Yango, China Fortune Land Development (China Fortune Land Development), the Xi’an Local Government Fund, Zhejiang, Jihua, or Zhejiang.