Chinese Shadow Bank Investigated For Criminal Activity

Following the collapse of Evergrande, another huge shadow bank is experiencing serious solvency problems.

The group has a $36 billion shortfall.

A major Chinese shadow bank is being investigated for criminal activity, after racking up enormous losses. Last week, Zhongzhi Enterprise Group (ZEG) informed investors that its liabilities, which may total as much as $64 billion, far outweigh its estimated $38 billion in assets.

The Chinese authorities said in a statement that they were taking action against a number of suspects, but their identities, and the charges against them, are unclear. Xie Zhikun, the company's founder, died of a heart attack in 2021.

Shadow Banking Problems

China's shadow banks function outside the formal banking regulatory framework. The shadow banking system includes various non-bank financial entities that provide banking-like services, such as lending and borrowing, but are not subject to the same regulatory oversight as traditional banks. The sector has grown significantly since the Global Financial Crisis, and now constitutes a $3 trillion industry.

These informal lenders have been instrumental in driving the country's property market. "For several decades China been chasing this property bubble—and in order to create this bubble, or to fuel growth in China, they needed capital," explains Andrew Collier, a shadow banking expert at Orient Capital Research. "So they started getting a lot of money from individual investors offering very, very high returns. And it worked for quite a while because the property prices were going up and it's a win-win for everybody."

More recently, however, concerns have arisen that risk mitigation in the shadow banking sector could cause serious problems, potentially spreading to the mainstream financial industry, and wider economy.

$36 Billion Shortfall

The organization told investors that management of the group had "run wild" after "multiple senior executives and key personnel" left after the death of founder Xie Zhikun.

The Chinese authorities have been attempting to address the slowdown in the country's property sector, which accounts for a third of economic growth.

While the language of "illegal crimes" and "mandatory measures" used by the authorities is vague, it recalls similar statements about Evergrande and its executives, which defaulted on its loans two years ago, triggering China's property market crisis.

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