China Initiates Criminal: The turmoil gripping one of China’s major privately-owned financial conglomerates has intensified, with Zhongzhi now under the scrutiny of a criminal investigation.
Beijing police have launched a probe into the wealth management unit of Zhongzhi Enterprise Group, as announced over the weekend. This revelation follows closely on the heels of the company’s disclosure to investors that it is “severely insolvent.”
In a statement released on Saturday, authorities suspect Zhongzhi of “illegal crimes” and have implemented “mandatory criminal measures” against several suspects, including one individual with the surname Xie. While the founder, Xie Zhikun, passed away from a heart attack in December 2021, his nephews continue to hold key positions within the group, according to Chinese state media.
The police have urged investors to actively collaborate in the investigation and evidence collection, providing no further details on the alleged crimes or the measures taken.
Under China’s Criminal Procedural Law, “criminal mandatory measures” can range from bail pending trial or house arrest to detention or arrest.
Zhongzhi oversees nearly a dozen asset and wealth management firms. In a letter to investors last Wednesday, it admitted to a “huge debt” and an inability to meet all its financial obligations. The company reported total liabilities of up to 460 billion yuan ($65 billion) against assets of 200 billion yuan.
“Liquidity is exhausted, and asset impairment is serious,” Zhongzhi stated in the letter, as reported by Chinese state-owned news outlets. “Preliminary due diligence shows that the group is severely insolvent and has significant ongoing operating risks.”
Zhongzhi apologized for its financial challenges, citing ineffective internal management since the founder’s death in 2021 and subsequent senior executive resignations.
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As of Monday, the group had not responded to requests for comment.
Situated in Beijing, the company is a key player in China’s $3 trillion “shadow banking” industry, a sector crucial for financing in the country. The term typically refers to financial activity occurring outside the formal banking system, involving off-balance-sheet activities by banks or non-bank financial institutions like trust firms.
Concerns about Zhongzhi’s financial health emerged in August when a trust it partially ownsZhongrong International Trustfailed to make payments to individual and corporate investors.
Demonstrators, captured on videos posted on Chinese social media, expressed anger and demanded payment related to investment products issued by the company. At least three listed companies were among the affected entities, with the missed payments totaling over 110 million yuan ($15 million).
These missed payments highlight how China’s prolonged property downturn might be affecting its financial industry.
A significant factor contributing to the company’s financial woes is its deep ties to China’s real estate sector. Zhongrong, managing $87 billion for corporate clients and wealthy individuals, invested approximately a tenth of its funds in real estate, according to its last year’s annual report.
Several companies in its real estate portfolio have grappled with a cash crunch since 2020, following regulatory crackdowns on developers’ excessive borrowing.
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