A 36-year-old wealth management firm in China with more than 100,000 high-net-worth clients delayed payment of its maturing wealth products as both the company and its parent firm faced a liquidity crunch due to soured investments in the property sector.
Zhongrong International Trust, formerly known as Harbin International Trust, which was established in 1987, has failed to give money back to its clients over the past few days after its second-largest shareholder, Zhongzhi Enterprise Group, reportedly ran out of cash earlier this month.
On August 11, the Shanghai-listed KBC Corp said it had bought two wealth management products issued by Zhongrong a year ago for a total of 60 million yuan (US$8.27 million) but failed to receive their principal and earnings worth 64.2 million yuan in total after they matured.
It said the investments only represented 0.86% of its total assets of 7 billion yuan and would not affect its normal business activities. But it added that this incident may hurt its profit margins this year.
Nacity Property Service, a Zhejiang-based real estate management firm, said it had bought a six-month trust product for 30 million yuan on February 9 but could not get back its principal plus interests of 5.8%.
Prior to this, Xianheng International Science and Technology, also listed in Shanghai, said on August 5 that it had invested in a Zhongrong wealth product for 20 million yuan and could get back only 17.2 million yuan when it matured. The company said unpaid principal and interest amounted to 2.57 million yuan.
An unnamed former employee of Zhongrong was quoted by Cailian Press, a financial website, as saying on August 11 that at least 350 billion yuan of Zhongrong’s wealth products that were sold through Zhongzhi’s sales channels had stopped payouts. He said the figure did not include the products directly sold by Zhongrong.
Cailian Press reported on Monday that some Zhongrong clients had already formed social media groups and had been discussing what they should do to fight for their rights and get back their money.
“My investment advisor pretended to have known nothing about the issue and removed himself from his social media groups,” said a Guangdong-based individual investor who uses the pseudonym “Chen Yan.”
Chen said she might be unable to get her money back as the products she bought wouldn’t mature for two more years.
Wang Qing, a Zhejiang-based individual investor, said her investment advisor explained to her that in the worst case scenario investors who bought wealth products for more than 10 million yuan can get back 50% of their money while those who bought products for less than 3 million yuan can get back 90% although the repayment period will be much longer.
Wang said she was told that a trust product she bought did not invest in real estate, but mainly in some pre-IPO firms.
According to business data search firm Tianyancha.com, Jingwei Textile Machinery, a central government-owned enterprise, has a 37.47% stake in Zhongrong, following by Zhongzhi (32.99%), state-owned Harbin Investment Group (21.54%) and Shenyang Antaida Commerce and Trade Co Ltd (8.01%).
In an article published on Monday several financial columnists write that Zhongzhi is the second largest shareholder of Zhongrong but it may actually have a controlling stake as Shenyang Antaida seems to be its associate company.
The National Financial Regulatory Administration (NFRA), China’s financial regulator, has set up a task force to examine risks at Zhongzhi after Zhongrong failed to make wealth product payments, Bloomberg reported on Monday. Established last month, the working group asked Zhongrong to report its plans for future payments and liquidity situations.
A netizen who claimed to be an employee of Hang Tang Wealth, one of Zhongzhi’s wealth units, said earlier this month that Zhongzhi had stopped its wealth product payout as of July 19. He said Zhongzhi has about 150,000 clients, including 5,000 companies, while the total amount of its default products might have reached 230 billion yuan.
Chinese media said Zhongzhi is managing about 3.72 trillion yuan of assets. They said Zhongrong’s clients were notified by their investment advisors on August 8 that Zhongrong had already stopped its wealth product payments. They said the company’s salespeople were still persuading clients to buy wealth products on August 7.
Since 2018, China’s financial regulators have urged trust companies to reduce their investments in the property sector. In 2020, while trust firms on average put 14% of their funds in the property industry, Zhongrong still had 18% of its funds allocated in real estate developers.
Zhongrong’s assets under management (AUM) fell gradually from 765.4 billion yuan at the end of 2019 to 629.3 billion yuan at the end of last year, according to the company’s annual reports.
Read: Regulatory squeeze to kill a third of China’s hedge funds
Follow Jeff Pao on Twitter at @jeffpao3