Chinese authorities open probe into troubled shadow bank Zhongzhi, detain suspects

Authorities have opened an investigation into Zhongzhi Enterprise Group and detained several suspects days after the shadow bank, one of mainland China’s largest, revealed a staggering US$36 billion shortfall that could threaten the stability of the country’s financial system.

Police in Beijing have imposed “criminal compulsory measures” against several suspects, including an individual surnamed Xie, according to a statement on WeChat on Saturday. Investors should actively cooperate with the police investigation and evidence collection, the statement added.

Xie Zhikun, the founder of Zhongzhi, died of a heart attack in 2021, but many of his relatives hold key executive positions in the company. The authorities did not elaborate on the measures that have been taken against the suspects.

The opaque term, similar to past cases against high-profile figures like China Evergrande Group founder’s Hui Ka-yin, can indicate possible house arrest in local regulatory parlance.

Xie Zhikun, the founder of Zhongzhi Enterprise Group, died of a heart attack in 2021. Photo: Weibo

Zhongzhi did not immediately reply to an email from the Post seeking comment on Sunday. A phone call to the company went unanswered.

The police investigation follows an announcement by Zhongzhi earlier this week, which revealed its liabilities had ballooned to 420 billion yuan (US$58.8 billion) while assets sat at just 200 billion yuan, implying a shortfall of as much as 260 billion yuan.

The Beijing-based wealth management titan, which oversees more than 1 trillion yuan of assets, is now “severely insolvent and facing high risks of sustaining normal operations”, it told investors on Wednesday in a letter seen by the Post.

Signs of trouble first surfaced in August, when Zhongzhi’s subsidiary, Zhongrong International Trust, delayed payment of maturing wealth products amid a liquidity crunch. That came amid a deepening real estate crisis, with major developers like Evergrande and Country Garden Holdings reeling from mounting debts and plunging property sales.

Many of the company’s trust products had invested heavily in the troubled property sector. Nearly 11 per cent of Zhongrong’s US$86 billion managed assets was invested in real estate, with stakes in troubled developers like Shimao Group and Sunac China Holding, according to the company’s latest annual report.

The liquidity crisis rattling China’s shadow banking industry could trigger risks in the broader finance sector and challenge the country’s already weakening economy, analysts said.

Zhongzhi’s investors should “actively cooperate with the investigations” so that the authorities can thoroughly investigate the case and make every effort to recover losses, Beijing police said in the statement.