Risk to China’s financial sector laid bare as state-backed trust firm misses US$19 million in wealth-management payments



Fears that China’s economic downturn may trigger liquidity problems in the financial sector rose over the weekend after state-backed Zhongrong International Trust missed principal and income payments on 140 million yuan (US$19.3 million) of wealth-management products sold to three listed companies.

The Harbin-based trust firm failed to repay 60 million yuan in principal and 4.26 million yuan of investment gains on two products due last week, Shanghai-listed KBC said in an exchange statement on Saturday. Meanwhile, Nacity Property Service Group, which also trades on the Shanghai bourse, said in a filing on Saturday that it did not receive 30 million yuan of principal Zhongrong was due to pay last week. Earlier this month, Xianheng International Science and Technology also said that the trust firm did not make repayments on three products.

The episode underscores the risk that the nation’s economic slowdown may trigger a liquidity crisis in the financial industry beyond the property sector.

“Zhongrong’s [possible] defaults will sour sentiment on the market, particularly the non-banking financial companies,” said Wu Kaida, an analyst at Topsperity Securities.

China’s economy shows no sign of regaining momentum after a July Politburo meeting signalled more easing measures. The latest data shows that both aggregate financing and new loans in July were half of what was expected by economists, highlighting weak demand and the deflationary trend.

Official data due on Tuesday is also likely to show China’s economy struggling. Industrial output, retail sales and fixed-assets investment are all expected to post only marginal growth, Bloomberg data showed.

Zhongrong did not answer a call from the Post for comment.

China’s CSI Index tracking the biggest onshore companies dropped 0.7 per cent to a three-week low on Monday after losing 3.4 per cent last week to post the worst performance in five months. It has now erased most of the gain spurred by the Politburo meeting. The Hang Seng Index tumbled by 1.6 per cent, also trading at a three-week low.

Shares of KBC slumped 5.7 per cent, and Nacity Property and Xianheng International lost 1.1 per cent and 0.9 per cent, respectively.

The wealth-management products in question mostly invest in bonds and other relatively low-risk, fixed-income vehicles.

KBC, a maker of high-performance carbon products, bought the two wealth-management products in August last year. They were expected to yield an annual return of 7.2 per cent and 7 per cent, respectively, according to the exchange statement. Both of the products were categorised as low-risk.

Founded in 1987 and formerly known as Harbin International Trust, Zhongrong had 1,633 trust products valued at 629.3 billion yuan by the end of last year, according to its 2022 annual result statement.

About 11 per cent of the assets were invested in the property market, with the rest allocated to infrastructure projects, financial institutions and stocks, Zhongrong said. Net income dropped 29 per cent from a year earlier to 1.06 billion yuan last year.

Zhongrong’s biggest shareholder is Jingwei Textile Machinery, a subsidiary of state-backed China Textile Machinery Group, which has a 37 per cent stake.

Wealth-management products are investment vehicles marketed to retail and corporate investors, which often pay yields higher than those paid by deposits. The values of China’s wealth-management products declined 5 per cent from a year earlier to 27.7 trillion yuan by the end of 2022, as redemptions rose amid a rout on the bond market, according to Fitch Ratings.

“The valuation of over 20 per cent of wealth-management products fell below par by end-2022, partly due to falling bond prices, as bonds made up around two-thirds of wealth-management products,” the ratings agency said. “We expect redemption pressure to remain in 2023.”

Image by: Pixapay



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Edmund Shing, PhD

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Edmund has over 29 years of experience in financial markets in a wide variety of positions, ranging from proprietary trading to portfolio manager in a number of financial institutions in London and Paris.  He previously held the role of Global Head of Equity and Derivative Strategy at BNP Paribas in London from 2015 to 2020, and has been Chief Investment Officer at BNP Paribas Wealth Management since November 2020.

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