Front page of the Wall Street Journal today: “Investors Fear China’s ‘Lehman Moment’ Is Looming.”
It’s about the Chinese firm Zhongzhi Enterprise Group, which I wrote about in the Morning Jolt on Monday. It’s one of China’s largest “trusts,” which are shadow banks involved in real estate, commodities, equities, and bonds. Several Zhongzhi investment products have been missing payments in recent weeks, spurring investor concern that the firm might collapse.
As always with China, it’s a bit tricky to figure out exactly what’s going on. The Journal reports:
On social media, some individual investors said they didn’t receive promised payments from Zhongrong products and some from Zhongzhi’s other units, and have complained to local authorities. Neither company has responded publicly to the allegations, and they didn’t reply to requests for comment. . . .
“Zhongzhi is a black box. They don’t have periodic disclosures, it’s a private company, and some investors don’t know what kinds of assets they’re investing in,” said Xiaoxi Zhang, an analyst at Gavekal Research.
But we do know overall confidence in Chinese markets is faltering. “Prices of many Chinese stocks and corporate bonds have tumbled this month, and Hong Kong’s Hang Seng Index, which is stacked with companies from China, fell into bear-market territory on Friday after declining more than 20% from its recent peak,” the Journal says.
Many of these concerns are connected to China’s ongoing real-estate bust. China’s former largest property developer, Evergrande, defaulted on its debts in late 2021 and filed for bankruptcy yesterday. China’s current largest property developer, Country Garden, is saddled with enormous amounts of debt that it is frantically trying to restructure amidst plummeting sales.
Trusts such as Zhongzhi were seen as safe havens in China’s financial markets, and if they prove to be faulty, investors could conclude that nowhere is safe. Investors from abroad are already reaching that conclusion. Foreign direct investment in China in the second quarter of this year is down 89 percent from last year. The number of hedge funds focused on China is declining, and the ones that remain are taking heavy losses.
Whether a systemic contagion-style collapse happens in China remains to be seen. But while the freer economies of the West continue to return to normal, the combination of increasingly authoritarian control over the economy, brutal Covid lockdowns, and a weak post-pandemic recovery is shaking China’s economy to its core.