Chinese state firms’ help to troubled shadow bank does little to address investor concerns

Chinese state firms’ help to troubled shadow bank does little to address investor concerns

Analysts and investors have stated that the involvement of two Chinese state-owned financial firms in Zhongrong International Trust Co’s operations and management may help diffuse risk at the troubled shadow bank. However, it does little to alleviate concerns about missed payments. Zhongrong, which has a significant real estate exposure, has missed payments on numerous trust products since late July, causing market turmoil and raising fears about the stability of China’s financial system in light of the property sector crisis.

Last month, angry retail investors in Zhongrong’s trust products protested in Beijing and lodged complaint letters with regulators, urging them to intervene after the missed payments. In response, Zhongrong announced that it had signed an agreement with Citic Trust and CCB Trust, the shadow banking arms of state-owned firms Citic Group and China Construction Bank, for “entrusted management services.” It remains unclear whether the support from these two firms was orchestrated by the Chinese authorities, but it is not uncommon for Beijing to involve state entities in order to contain broader contagion risk and bail out troubled financial institutions.

According to the agreement, Citic Trust and CCB Trust will provide professional services for the operations and management of Zhongrong. However, this arrangement will not affect Zhongrong’s debt ownership and legal relationship in trust products. A senior executive at a Beijing-based research firm, who preferred to remain anonymous, stated that this latest development is a standard procedure used by Beijing to mitigate risks at troubled shadow banks in recent years.

Despite the involvement of the two financial firms, concerns remain that investors will not be able to recover all of their money. It is likely that they will face significant reductions in principal during the repayment plan, further eroding confidence in trust products. The Chinese authorities have been actively working since 2017 to reduce risks in the shadow banking sector, which has been a cause for concern due to its exposure to assets accumulated through opaque fundraising channels.

Under the agreement, Citic Trust and CCB Trust will assess Zhongrong’s current operations and assist the firm in devising a repayment plan. However, Zhongrong, the National Financial Regulatory Administration (NFRA), and the People’s Bank of China (PBOC) have not yet responded to requests for comment. Similarly, Citic Trust and CCB Trust have not provided any comments on the matter.

The outsized exposure of China’s $3 trillion shadow banking sector to property developers and the broader economy has raised concerns over the past year. Trust firms, which operate outside many of the regulations governing commercial banks, primarily channel funds from wealth products sold by banks to real estate developers, other sectors, and even retail investors. Analysts warn that a wave of defaults on trust products could have significant ripple effects on China’s economy, as individual investors who were enticed by higher returns would suffer losses that could impact consumption.

At the end of 2022, Zhongrong managed assets worth 785.7 billion yuan ($107.69 billion), with 629.3 billion yuan linked to trust products, according to its latest annual report. While some investors see the involvement of Citic Trust and CCB Trust as positive news that provides some clarity, others remain skeptical about the possibility of recovering their invested money. The situation is expected to be a lengthy battle, and detailed repayment plans may take time to materialize.

In conclusion, the involvement of two Chinese state-owned financial firms in Zhongrong’s operations and management is seen as a measure to mitigate risk at the troubled shadow bank. However, concerns about missed payments and the overall stability of China’s financial system persist. The Chinese authorities have been working to reduce risks in the shadow banking sector, which has significant exposure to the property sector. Trust firms, operating outside traditional banking regulations, play a crucial role in channeling funds to various sectors. The involvement of Citic Trust and CCB Trust is seen as a standard procedure to address risks in troubled shadow banks. However, investors may still face significant reductions in principal, further undermining trust in trust products. The long battle to recover investments is expected to continue, with detailed repayment plans yet to be finalized.

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

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