“Who is it?”
“It’s the police. We’re here about your high-yield savings account. Open up.”
In news that’d be too absurd to be true if it didn’t emanate from Xi Jinping’s farcical surveillance state, Chinese police are now making house calls to investors in wealth management products sold by Zhongzhi Enterprise Group, the trillion-yuan conglomerate at the heart of China’s burgeoning shadow banking crisis.
Earlier this week, a handful of aggrieved investors showed up at the offices of Zhongrong International, which is partially controlled by Zhongzhi. Zhongrong missed payments on some of its trust products recently, sparking a small panic that now threatens to morph into a conflagration. China’s trust industry likely has around $225 billion in exposure+ to the struggling property sector, and liquidity is plainly drying up.
If there’s anything the Party fears, it’s social unrest. And Xi is keen to ensure that protests tied to missed payments on wealth management products and other investments peddled by China’s shadow banks don’t trigger widespread discontent.
On Thursday, Bloomberg published an account of China’s efforts to preempt demonstrations. “Dozens” of investors, the linked piece said, have received in-person visits and phone calls from police “asking” them not to participate in protests. This effort isn’t localized. The article documented instances of police contact with Zhongzhi investors in Beijing, Sichuan and Jiangsu. Sources described their interactions with authorities as “cordial,” but at least some of door knocks came at night.
Suffice to say police aren’t really asking. According to some of the investors who spoke to authorities in recent days, Chinese officials said they obtained Zhongzhi’s client lists. So, if you’re a Zhongzhi investor, the police know who you are. And Xi is politely (for now) advising you not to express your dismay at the situation in public.
Not everyone’s listening. According to the FT, a throng of retail investors visited China’s National Administration of Financial Regulation on Wednesday to lodge formal complaints. Some of them brought physical letters (bless their hearts). “Police took one group to a nearby bench after denying them entry,” the FT said, adding that “more than a dozen officers formed a human chain around them screening them off from the rest of the city.”
As it turns out, Zhongzhi hired KPMG late last month. They (Zhongzhi) apparently knew the situation was acute, and are planning a debt restructuring as well as asset sales. According to sources who spoke to Bloomberg for yet another amusing piece published on Thursday, Zhongzhi probably isn’t making payments on any of its products.
There’s a Ponzi scheme aspect to this, even if Zhongzhi and other Chinese shadow banking participants aren’t, strictly speaking, Ponzi schemes. There was some discussion this week about rollover risk. This industry relies, in part anyway, on selling new wealth management products to investors in order to pay existing investors on maturing products. If confidence evaporates and they can’t sell new products, their capacity to make payments can become severely constrained. Do note: This isn’t new. Rollover risk for these products is a key pillar of any China shadow banking collapse thesis.
“Zhongrong has no immediate plan to make clients whole,” Bloomberg went on, adding that it’s not clear whether Zhongzhi has “sufficient assets to cover [the] shortfall” on defaulted products “if liquidated.” On the bright side, Zhongzhi says it controls 4.5 billion tons of proven coal reserves. Maybe they can distribute that to investors in lieu of cash payments.