China: $32 Billion Trust Default
Rumors are swirling of a major default of a trust product from Zhongrong, a subsidiary of the Zhongzhi Group. The story hit after the market closed on Friday, so unless it leaked, it likely doesn’t explain Friday’s drop. There are other concerns in the market such as County Garden’s collapse. The major developer saw its share price fall below its IPO price from 2007 as its 2024 dollar bonds collapse towards 20 cents on the dollar.
To place the news below in proper context, know four things.
First, this has happened before. China has dealt with trust defaults for the better part of a decade.
Second, it is a sign of the global slowdown and U.S. dollar rally (shortage). The first time defaults starting popping up was in 2014.
For prior coverage, see the 信托 and 担保 tags at the blog.
This post from 2015 has links to many other posts on the subject: The Credit Dominoes Are Falling Again; Northeast Faces Deflationary Collapse Without Bailout
Third, people always speak of contagion because there are interlocking financial relationships between firms. A different example, but to highlight how things work in the extreme: Credit Guarantee Firms Go Down Like Dominoes
In a nutshell, Chinese companies in a province, city or even a borough within a city, used to cross guarantee each others’ debts. Some of them are also in the business of credit guarantees. If one important firm, not necessarily in size but in the amount of debt it has guaranteed, goes bust, then banks start asking the guarantors for money and bing, bang, boom, mass defaults.
In this story, listed Chinese companies have invested large amounts with the trust company in question. The firms speaking with the press say the amounts don’t affect their business and there’s no reason to doubt that. That said, the risk of contagion comes from potentially unseen financial relationships between as yet unmentioned firms or if the trust company itself goes bust. China has clamped down on negative economic news and finding out information about these situations was already difficult to being with. Hence rumors and speculations fill the gaps. All of which is to say: don’t bank on rumors. The Western reporting has improved, but social media is loaded with anti-CCP voices who magnify (or invent) every negative news story.
Fourth, the Shanghai Composite sits less than 5 percent away from major support. The market is already close enough to a breakdown that it doesn’t even require negative news. Therefore, the news below doesn’t have to be some major default. It only need spook investors or hint at another notch lower in the slowdown to have greater impact.
STCN: 光大、五矿信托紧急声明!两A股公司官宣:“踩雷”中融信托
On the evening of August 11, two A-share companies announced that the principal and investment income of the trust products purchased by Zhongrong Trust had not yet been recovered, and there was a risk that the principal and interest could not be paid in full or only in part.
This morning, there were rumors in the market that "Zhongrong Trust also stopped redemption today due to the thunderstorm in Zhongzhi", and that "trust products such as Minmetals Trust and Everbright Trust bought by investors were also notified to stop redemption."
In this regard, Everbright Trust and Minmetals Trust urgently refuted the rumors on the evening of August 11.
The latter two firms are rumored defaults and both companies deny the rumors. The first though, Zhongrong
On the evening of August 11, Jinbo and Narada Property both announced that the products of Zhongrong Trust were overdue.
Nandu Property stated in the announcement that the company purchased the 30 million yuan Zhongrong-Huijujin No. 1 Monetary Fund Collective Fund Trust Plan, but as of the announcement date, the company has not received the principal and investment income. In view of the uncertainty in the recovery of the investment funds and the nature of non-principal-guaranteed wealth management products, there is a risk that the principal and interest cannot be recovered in full.
The total amount in default is 230 billion yuan according to reports I’ve read, or roughly $32 billion at the current exchange rate.
This is a developing story. Based on history, it goes nowhere. It popped onto my screen though, which is why I’m posting on it. It’s got a little more oomph behind it because there’s some concern if the firm behind the trust might go bust and trigger contagion.