Chinese shadow bank exposed to struggling property developers

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China’s shadow bank, at the heart of concerns over missed payments by its customers, has lent money to several of the country’s troubled property developers, according to a Financial Times analysis of legal and company filings.

Ties between Zhongrong, a giant in China’s $3 trillion shadow financial sector, and real estate developers have fueled fears of fallout from the slowdown in the real estate sector, which accounts for more than a quarter of China’s economic activity.

This adds to growing concerns about the state of China’s economy, which is struggling to recover after the Covid-19 pandemic.

Zhongrong and other shadow banks in the so-called trust sector sell high-yield savings products to retail and corporate investors. They then lend their savings to businesses across China, including real estate developers.

An estimated 11% of Zhongrong’s assets are invested in the real estate sector, the company said, but it does not provide information on any of its specific investments, and data on the entire sector often lacks transparency.

Zhongrong did not disclose its missed payments, and they were made public through stock exchange filings by listed companies.

Legal filings from 2022 and 2023 reviewed by the FT show Zhongrong filed lawsuits for more than RMB 8.7 billion ($1.2 billion) against Sunac, once one of China’s largest developers, which defaults in 2022. Sunac concluded an offshore debt restructuring plan in March. It is unclear what deal Zhongrong has with Sunac, if any.

Zhongrong delayed payments for two products due in March 2021 and April 2022, according to an April disclosure from textile chemicals company Zhejiang Jihua. State media linked the products to real estate projects developed by China Fortune Land Development and Sunac respectively.

In December 2020, Zhongrong lent money in the form of a RMB 1.5 billion perpetual bond to China Fortune Land Development, according to the latter’s filing. The company, one of China’s leading developers, defaulted on its international debts two months later.

Zhongrong also loaned an unknown sum to Yango, another major developer that defaulted in 2022. It was repaid RMB 3.3 billion when the project linked to the loan was sold, according to a filing by Yango in June from last year.

In May 2022, Zhongrong sued Evergrande and other developers over a dispute over a RMB 1.9 billion loan agreement, according to a 2022 Evergrande bond report. It’s unclear how much additional exposure Zhongrong has to Evergrande, the world’s most indebted developer. Last month, the real estate group said it faced more than 2,000 lawsuits worth RMB 30 million or more, with a total value of around RMB 535 billion.

Zhongrong has struggled to secure repayments from at least one local government, whose high debts are a major concern for Beijing. A Xi’an city government investment fund said in a July filing that it had delayed repayment of a 900 million RMB loan to Zhongrong, blaming the problems on “land development.”

Zhongrong has total assets of RMB 629 billion, according to its 2022 annual report. It is the only major trust company with more than 10 percent of its overall exposure tied to real estate.

In a statement on Friday, Zhongrong acknowledged it was unable to pay for some of its products on time and said it had reached an agreement with state-backed Citic Trust and China Construction Bank Trust under from which they would provide Zhongrong with “entrusted management.” services”.

The entire trust industry in China, which includes 68 companies, has total assets of 21 trillion RMB and direct real estate exposure of 1.1 trillion RMB in the first quarter of this year, according to the China Trustee Association.

This data counts bonds, which are often issued by property developers, in a separate category and does not include figures for local government financing vehicles. Trust companies’ exposure to bonds has more than tripled since mid-2020, data shows.

“There is no breakdown of the number of bonds” [proceeds] are invested in the real estate sector,” said an analyst covering the sector, who asked not to be named. “The actual exposure could be more than what you see for the property itself.”

Zhongrong, Sunac, Evergrande, China Fortune Land Development, Yango, Xi’an Local Government Fund and Zhejiang Jihua did not respond to requests for comment.

Additional reporting by Andy Lin in Hong Kong