Shadow bank Zhongzhi files for bankruptcy as China’s debt and property crisis deepens

Zhongzhi Enterprise Group filed for bankruptcy liquidation late Friday, as the Chinese shadow banking conglomerate is unable to repay its debt amid a deepening real estate crisis in the country.

The company has filed for bankruptcy on the grounds that it is “clearly” lacking the ability to repay debt and has insufficient assets to pay off its dues, according to a WeChat statement issued by Beijing’s First Intermediate People’s Court.

Shadow banks in China operate by pooling household and corporate savings to offer loans to invest in real estate, stocks, bonds, and commodities. Companies such as Zhongzhi have often financed many large Chinese property developers.

Zhongzhi had warned about its distressed financial situation as far back as August when Reuters reported that the company had told investors it was facing a liquidity crisis.

It then declared insolvency in a letter to its investors in November, shortly after which Beijing police commenced an investigation into the debt-laded shadow bank.

“While the firm’s creditors are mostly wealthy individuals rather than financial institutions, its collapse could nevertheless hurt general market confidence. It could also renew concerns over the trust industry and whether it would have broader and significant implications for the ailing real estate industry,” analysts at Commerzbank wrote in a client note.

The broader CSI 300 index fell 1.2% by early afternoon trading, weighed down by property stocks.

Hong Kong listed shares of property firms including Logan Group, China Vanke, Sunac and Longfor Group dropped between 2% and 3.6%.

China’s government has in the last few years tried to limit the rapid growth of non-bank debt issued by shadow banks.

The largest banks in China are state-owned, making it harder…