China Shadow Bank’s Missed Payments Show Growing Property Stress

The $3 billion repayment crisis in eastern China is reigniting concerns about the country’s shadow banking industry, which is loosely regulated because of the risk of the long-running real estate collapse spilling over into the financial sector.

According to sources familiar with the matter, Hangzhou-based Zhejiang Zhejin Asset Operation Co. Investors with nearly 20 billion yuan worth of asset management products sold through the company failed to receive payments due in late November. The products’ underlying assets were debt claims from real estate developers affiliated with Sunriver Holding Group Co., according to documents seen by Bloomberg News.

This affects thousands of investors, many of whom are government employees and employees of state-owned firms, said one of the people, who asked not to be named discussing a private matter. The subsequent rush to withdraw funds further increased liquidity pressure on the stock market and led to a freeze on refunds.

The incident is the latest indication of how China’s shadowy banking industry has allowed the country’s protracted real estate collapse to spread to other areas of the economy and create a long list of victims. The crisis came to the fore again last month after the country’s largest construction company, China Vanke Co., shook markets by demanding a postponement of bond repayments.

It also brings to light long-standing structural weaknesses in the country’s vast shadow banking network. Unlike traditional lenders, which are subject to stringent capital adequacy and risk reserve requirements, these financial intermediaries outside the regulated banking system operate with fewer restrictions, increasing the likelihood of contagion into other sectors when they encounter difficulties.

Sources said many investors bought products on the platform formerly known as the Zhejiang Financial Assets Exchange, which were secured due to partial ownership by state-backed entities. But after it gradually moved into majority private ownership in recent years, some investors said they didn’t realize it had become a de facto private financing conduit for Sunriver, a conglomerate whose businesses include real estate development and tourism.

Local authorities banned the platform from offering financial asset trading services in October last year.

Zhejin Asset did not immediately respond to requests for comment from Sunriver and local financial services watchdog Bloomberg.

Most of the financial products in the Zhejiang case were issued by Sunriver subsidiaries, according to documents seen by Bloomberg News. Sunriver relied heavily on real estate projects to generate quick revenue but experienced a “temporary liquidity crunch” after sales dropped, an executive told local media. The group has total assets of about 60 billion yuan and debt of 40 billion yuan, the executive added.

The payment problems were previously reported by local media including Caixin and Yicai.

At least 10 of Sunriver’s subsidiaries, mostly real estate developers, have defaulted on commercial paper over the past year, according to a filing from Shanghai Commercial Paper Exchange Corp.

Regulators, long aware of the risks associated with shadow banking, have stepped up efforts to rein in risky activities in recent years. In 2018, regulators banned nonstandardized pools of funds and restricted “conduit business,” a common practice in which institutions help traditional banks remove assets from their balance sheets.

Authorities also issued “window guidance” ordering trust companies and financial asset exchanges to limit real estate-related financing and strictly verify the creditworthiness of developers.

The measures had some initial impact. Assets in the shadow banking sector fell to 84.8 trillion yuan at the end of 2019 from a peak of 100.4 trillion yuan in 2017, according to a study by the banking regulator. It has not released more updated data since then.

The recent trouble in Zhejiang is a reminder that the problem has never completely gone away. This risks further weakening households’ confidence in the country’s financial system, where investment returns are difficult to achieve. In 2022, an alleged multibillion-dollar fraud against some rural lenders in Henan province led to violent clashes between local police and protesters demanding their money back.

Authorities in Zhejiang province have established a special working group to address the latest crisis and maintain financial and social stability. However, according to familiar sources, it will take time for the group to offer concrete solutions that can repay investors.

With the help of Emma Dong.

This article was generated from an automated news agency feed without modifications to the text.