Missed repayments still a warning with implications for real estate sector

Zhongrong International Trust Co Ltd's missed payments on a few maturing trust products are unlikely to spark systemic risks in China's financial system, so talk of any contagion risk to commercial banks may be exaggerated and unwarranted, said experts on Wednesday.

However, Zhongrong's credit event should be treated as a warning about potential financial risks that may arise if the country's property market troubles aggravate, they said.

China, they said, may amplify policy efforts to stabilize market expectations on the property front.

Their comments emerged as at least eight A-share listed companies had disclosed that Zhongrong, which had 629.3 billion yuan ($86.3 billion) worth of trust assets under management at the end of last year, had failed to repay them the maturing trust products it managed.

For instance, Hangzhou Innover Technology Co Ltd, a Shenzhen-listed gas meter producer, announced on Wednesday that Zhongrong did not repay the company and its subsidiary the principal and interest on 40 million yuan worth of trust products.

Wednesday's announcement followed a similar one on Monday when Innover disclosed Zhongrong's missed payments on 50 million yuan worth of products.

Experts said more listed companies could be affected as Zhongrong struggles to meet its payments amid its shareholder Zhongzhi Enterprise Group's financial stress, but hastened to add that Zhongrong's credit event is not of the scale that could pose significant risk to China's entire financial system.

S&P Global Ratings, one of the world's three most prominent ratings agencies, said in a report, "The type of trust sector products that are coming under pressure represent just a fraction of assets in the financial system, and that contagion risk to the broader banking sector is limited."

According to news reports, Zhongrong's missed payments are related to "fund-pooling" type products, whereby funds from different investment products are pooled together and proceeds from newly sold products are used to repay old ones.

The size of this type of products has decreased after asset management rules were launched in 2018. According to S&P Global Ratings, shadow banking activities, such as wealth management products that serve as loans, have nearly halved from the peak in 2020 to 3 trillion yuan, a figure that is absolutely large but still small relative to the nearly 400 trillion yuan of assets within China's banking system.

"What we are seeing (in the Zhongrong's credit event) is the last gasp of risky practices in the trust sector," said Zhong Yiran, a credit analyst at S&P Global Ratings.

Yang Haiping, a researcher at the Central University of Finance and Economics' Institute of Securities and Futures, said investors of Zhongrong's products are mainly high-net-worth individuals and corporate clients, who were attracted by the high asset yields pledged by Zhongrong's real estate-related trust products.

By contrast, commercial banks' exposure to those products is limited, thanks to the asset management rules, leaving the banking sector — its assets account for about 90 percent of the country's financial sector — largely unaffected, Yang said.

"Zhongrong's event is part of the manifestation of risks related to the real estate downturn," said Charlie Zheng, chief economist at Samoyed Cloud Technology Group Holdings. "Many trust products that face difficulty in repayment are mainly those used to finance real estate projects."

While Zhongrong's credit event is highly unlikely to snowball into a full-blown contagion risk, Zheng still urged more measures to stabilize property market expectations, including further tamping down mortgage interest rates.

"Commercial banks have provided a large portion of loans to real estate developers, meaning that the liquidity strain of troubled developers can directly affect commercial banks."

If the property sector's distress continues, risks could increase, potentially affecting more entities in the financial sector, said Fitch Ratings.

Liu Zhihua contributed to this story.