Why China’s Markets Are Being Rocked By Fears of Contagion

Chinese regulators have sought for years to get to grips with the $2.9 trillion trust industry, a corner of the country’s shadow-banking sector that offers bigger returns than regular bank deposits but can be fraught with risk. A reckoning arrived on Jan. 5, when one of the sector’s biggest players, Zhongzhi Enterprise Group Co., filed for bankrupcy, victim of a property crisis that’s bedeviled the world’s second-largest economy. China’s banking regulator had vowed in November to use “strong medicine” to tackle major risks in the country’s financial sector. But the collapse of Zhongzhi in one of China’s biggest ever bankruptcies still came as a shock to investors, given the government’s past willingness to throw an occasional lifeline to struggling firms.

They are loosely regulated firms that pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. No other Chinese financial companies operate across all of these asset classes. The sector was once seen as a safe place for wealthy Chinese to park their money for heftier returns. But trust firms have defaulted on billions of dollars of investment products in recent years and the industry has shrunk by about 16% from its peak in 2017, when regulators began clamping down on the nation’s shadow-banking excesses.