2023-08-20 06:20:00
Headquarters of Zhonglong International Trust in Beijing, China | AFP Yonhap News
The real estate crisis, which began with the default of Chinese real estate developer Biguiyuan (碧桂園, Country Garden), is spreading to the Chinese financial sector. There are also concerns that the Chinese version of the Lehman Brothers crisis may occur as the Chinese trust company Zhonglong, which invested in real estate development, stopped redemption.
On the 18th (local time), the Wall Street Journal (WSJ) reported this when referring to the suspension of redemption of Chinese asset management company Zhonglong International Trust. Zhonglong International Trust, an affiliate of the financial group Zhongzhi Group, is one of China’s top 10 trust companies with assets under management of US$108 billion as of the end of last year.
Zhonglong International Trust recently suspended interest and principal repurchase of dozens of investment trust products. The amount of damage from redemption suspension alone reached 14 million dollars (18.8 billion won), as revealed by the exchange disclosure of the three listed companies that entrusted money to the four funds of Zhonglong International Trust. Investors who have not received investment funds are also posting complaints on China’s social network service (SNS).
Trust companies in China have been a source of financing for real estate developers. It is known that Junglong International Trust also invested a significant portion of its trust funds in real estate. The suspension of redemption by the Zhonglong Group in conjunction with the biguyuan default is raising anxiety about China’s financial system.
Xiaoshi Zhang, a researcher at Gabecali Research, said, “Zhonglong’s parent company, Jungji Group, is like a ‘black box’. “Since it is an unlisted company that does not make regular disclosures, some investors do not even know what assets they are investing in.” He continued, “The concern is that the ‘Lehman Moment’ is beckoning, threatening the soundness of China’s financial system.” However, he evaluated that “the possibility of a crisis actually occurring due to the vigilance of the regulatory authorities is low.”
Nomura Securities also said in a recent report, “The risk exposure of Chinese trust funds in the real estate sector is currently under great threat.” can be increased,” he said.
Real estate in China is the biggest source of finance for local governments. Therefore, when real estate prices fall, a vicious cycle can occur: depletion of financial resources by local governments → reduction in fiscal spending → increase in unemployment due to economic stagnation → increased possibility of a financial crisis.
The fact that Hengda Group (恒大), which was in financial difficulties after declaring default in 2021, applied for protection of its production in the United States is also a factor that fuels market unrest. According to foreign media, Chinese real estate developer Hengda filed for bankruptcy protection under Article 15 (Chapter 15) of the Bankruptcy Protection Act in New York on the 17th (local time). Chapter 15 is a procedure to protect assets from debt repayment claims and lawsuits from creditors in the United States when foreign companies pursue rehabilitation. Hengda has yet to file for bankruptcy protection in China, which is interpreted as an attempt to reconcile its overseas debt first.
Han Kwang-yeol, a researcher at NH Investment & Securities, said, “Starting with Hengda Group in 2021, real estate companies such as Zhao Jiaoye and Greenland Group are continuing to go bankrupt.” Considering oversupply, declining buying sentiment, and the need to ease competition in the real estate market through restructuring, credit events for real estate companies with high debt burdens and low competitiveness are highly likely to continue for the time being.”
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