(Bloomberg) — Chinese leaders pushed for an unusually speedy resolution for Zhongzhi Enterprise Group Co. after the shadow banking giant collapsed, underscoring the government’s increased focus on containing financial risks as the economy struggles.
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Top officials concluded in October that bankruptcy would be the most effective approach in limiting the impact on financial markets, less than three months after Zhongzhi and its units defaulted on dozens of wealth products sold to the public, people familiar with the situation said, asking not to be identified discussing internal matters. Authorities approved the bankruptcy in late December, they added, before a court disclosed it last week.
The swiftness indicates little tolerance among top leaders to risks as they seek to prevent the nation’s property crisis from crippling the financial system. While Zhongzhi’s creditors are mostly wealthy individuals rather than financial institutions, its downfall marks one of China’s biggest-ever bankruptcies and risks adding more stress on already fragile consumer and investor sentiment.
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Unlike Zhongzhi, most of China’s highest-profile debt failures in recent years have tended to go through debt restructurings first, avoiding formal bankruptcy. HNA Group Co., a conglomerate that collapsed with billions of dollars of debt around 2020, completed its restructuring work in 2022. China Evergrande Group, whose default in 2021 accelerated the country’s property crisis and which has nearly $330 billion of liabilities, is still struggling to avoid liquidation and hasn’t filed for bankruptcy.
“It signals China is accelerating its efforts to fix historical issues to prevent financial risk spillover,” said Sun Jianbo, founder of Beijing-based asset manager China Vision Capital. “Authorities have also gained rich experience from dealing with all sorts of defaults and risk events over the past few years, enabling them to act quickly this time.”
The speedy start of bankruptcy proceedings may also indicate more efficient handling of troubled firms. At a twice-a-decade financial policy meeting at the end of October, President Xi Jinping stressed the need to effectively prevent financial risks and crack down on any illegal financial activities.
The push for bankruptcy was based on a comprehensive examination on Zhongzhi by a task force set up by the National Financial Regulatory Administration in July, the people said.
The Beijing-based conglomerate said it “obviously” lacked the ability to repay its debts, according to a statement Friday from Beijing’s First Intermediate People’s Court, which accepted the case. Analysts have estimated that the financial giant — which at its peak had more than 1 trillion yuan ($140 billion) in assets — could hand investors losses of as much as $56 billion.
The crisis also has broader legal implications. Authorities in November opened criminal investigations into the money management business days after the firm revealed a shortfall of $36.4 billion, telling investors it was “severely insolvent.”
Concerns about the financial giant ramped up when one of its affiliates — Zhongrong International Trust Co. — failed to repay customers on high-yield investment products, sparking protests in Beijing. The group holds stakes in five other licensed financial firms, including a mutual fund manager and two insurers, and invested in five asset management companies and four wealth units, according to its website.
Zhongrong Trust is set to be exempt from the bankruptcy proceedings and will seek new strategic investors, said the people. The firm has hired three third-party agencies, including China United Assets Appraisal Group, to review its balance sheet and evaluate repayment plans, they said.
The NFRA and China United Assets didn’t respond to requests for comment.
The banking regulator, which oversees trust firms, has vowed to use “strong medicine” to tackle major risks. Officials will accelerate the disposal for high-risk insurance and trust institutions, such as Evergrande Life and Zhongrong Trust, central bank governor Pan Gongsheng said in a report to legislators in late October.
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