China's 201 Trillion 'Shadow Finance' Shaken by Real Estate Crisis

Junglung Faces Financial Difficulties Unable to Repay Investment Principal and Interest
Non-Bank Finance Struggles to Assess Scale of Insolvency

The crisis triggered by the default of Chinese real estate developer Biguiyuan (Country Garden) is now spreading into China's real estate "shadow banking (non-bank finance)" sector, estimated to be at least 201 trillion won in scale.

According to major foreign media on the 17th (local time), Zhongrong International Trust recently announced in a statement that due to market instability, it failed to pay principal and interest on some financial investment products on time, and that it has signed a trust management service contract with Zhongxin Group, a Chinese state-owned enterprise, and the trust subsidiary of China Construction Bank.

Zhongrong is a leading Chinese real estate trust company that invests corporate and asset owners' funds in real estate and other sectors. It has been reported that Zhongrong is facing severe financial difficulties to the extent that it cannot pay principal and interest on trust products to investors on time, and the company has officially confirmed this. Zhongrong lent money to numerous real estate developers but has been unable to recover investments due to the real estate market downturn.

Zhongrong’s funds were invested in many real estate developers that declared defaults, such as Sunac, Huaxia Xingfu, and Evergrande. According to analyses by major foreign media, Zhongrong filed a lawsuit demanding compensation of 8.7 billion yuan (1.59 trillion won) after failing to recover loans from Sunac. Sunac declared default in 2022 after being sued and reached an agreement with Zhongrong in March, though the details remain undisclosed. Zhongrong lent 1.5 billion yuan (270 billion won) in perpetual bonds to Huaxia Xingfu in December 2020, but Huaxia Xingfu declared default just two months later. Zhongrong also lent large sums to Chinese real estate companies Yangguangsheng and Evergrande, both of which defaulted. Zhongrong recovered 3.3 billion yuan (600 billion won) from Yangguangsheng and filed a damage compensation lawsuit worth 1.9 billion yuan (340 billion won) against Evergrande and other developers in May last year. It is also reported that 900 million yuan (164 billion won) lent to the Xi'an local government has not been repaid.

Given this situation, Zhongrong is also unable to repay funds raised from investors. Textile chemical company Zhejiang Jihua revealed in April that Zhongrong has not repaid principal and interest on investment products maturing in March 2021 and April 2022. These products are reportedly related to Huaxia Xingfu and Sunac.

As Zhongrong’s financial difficulties surface, analysts say that the fragility of China’s shadow banking sector is also coming to light. However, since the full scale of shadow banking hidden beneath the surface cannot be measured, it is difficult to grasp the extent of the fragility. According to the China Trustee Association, the total assets of the Chinese trust industry in the first quarter of this year were about 21 trillion yuan (3,830 trillion won), of which the real estate-related sector is estimated at 1.1 trillion yuan (about 201 trillion won), but the actual scale of shadow banking in the real estate sector is believed to far exceed this.

A Chinese real estate expert said, "It is impossible to know how much money has been invested in the real estate sector," adding, "The actual exposure is likely much higher than what we are currently seeing in the real estate market itself."

This content was produced with the assistance of AI translation services.