Chinese Police Pay "Cordial Visits" To Homes Of Angry Zhongrong Investors "Urging" Them Not To Protest
One day after we reported that angry investors in Zhongrong International Trust, aka "China's Blackstone", one of the country's largest - and now insolvent - shadow banks, were protesting outside the company's office upon realizing their funds were likely gone for good, Bloomberg reports that in an attempt to prevent further public displays of disaffection, police officers visited the homes of investors from across China who put money in a troubled shadow bank said and urged them to avoid public protests.
According to the report, dozens of people who invested in Zhongzhi Enterprise Group’s wealth management products have received what they described as "cordial visits" from police in recent weeks, according. The group spanned a wide geographic area, including the capital Beijing, the southwestern province of Sichuan, and the coastal areas of Jiangsu and Shandong.
An investor in Jiangsu, the eastern province bordering the financial hub of Shanghai, said police visited her home one night this week and asked her not to join any demonstrations involving people angry about losses. They recorded details of her investment, including the amount involved, and said regulators would handle the matter, the investor said.
There were many others: a person in nearby Zhejiang province said he knew of dozens of investors who got calls from police urging them not to demonstrate and to remain patient. Police told investors they were using Zhongzhi client lists to make calls, according to the person. Several investors said they have consulted lawyers about their losses, and have set up social media chats to share information. Remarkably those chats haven't been censored yet.
The proactive police action signals a desire by authorities to deter any outbursts of public anger over Zhongzhi, which manages more than 1 trillion yuan ($137 billion) of assets and faces potential failure. Of course, we already know that the efforts haven’t been entirely successful: This week a group gathered briefly at the Beijing offices of Zhongzhi-backed Zhongrong to demand payment on high-yield products. It only means that the "cordial" police visits are about to become more "persuasive."
The proactive police action signals a desire by authorities to deter any outbursts of public anger over Zhongzhi, which manages more than 1 trillion yuan ($137 billion) of assets and faces potential failure. Of course, we already know that the efforts haven’t been entirely successful: This week a group gathered briefly at the Beijing offices of Zhongzhi-backed Zhongrong to demand payment on high-yield products. It only means that the "cordial" police visits are about to become more "persuasive."
As we reported yesterday, videos of the protest by about two dozen people in Beijing circulated on WeChat and showed one woman asking angrily: “Why doesn’t the company pay us back?” The protesters were met by about 10 police and security officers, and a company official spoke with them through a loudspeaker. Police later parked several cars, vans and city buses in the area, while workers erected extra fencing around the building.
Unfortunately for investors in Zhongrong their money is almost certainly Zhon-gone.
That's because in a separate report we learn that Zhongrong is planning to restructure its debt and has hired KPMG LLP to conduct an audit of its balance sheet. Traditionally such debt-for-equity swaps mean that the existing equity is wiped out, and actual investment holdings by the company may also be impaired.
According to Bloomberg, Zhongzhi hired KPMG in late July to review its balance sheet amid a worsening liquidity crunch: the Beijing-based company plans to restructure debt and sell assets after the review in order to repay investors, the people said. The company managed more than 1 trillion yuan ($137 billion) of assets much of it tied to real-estate; it is unclear what the value of its investments is following the recent turmoil in the property market.
It wasn’t immediately clear how many products Zhongzhi has defaulted on and whether the company has sufficient assets to cover the shortfall if liquidated, said the people, adding that any restructuring process will likely be lengthy. Zhongzhi has suspended payments on nearly all its products.
Finally, in a sign that Chinese authorities are worried about potential contagion, the banking regulator has set up a task force to examine risks at Zhongzhi. The concern is Zhongzhi becomes unable to draw sufficient new investment to replace maturing funds - in other words it is no longer a functioning Ponzi - increasing the risk of more missed payments, said Dinny McMahon, an analyst for consultancy Trivium China and author of China’s Great Wall of Debt.
“When investors start to lose faith, then all of a sudden an outfit’s ability to continue to raise new funds becomes more difficult,” McMahon said. “Then the potential for defaults to cascade becomes more and more.”
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