China: Zhongzhi announces insolvency, spooks property stocks

Chinese property stocks move lower on news that the shadow bank Zhongzhi Enterprise Group is under investigation by Beijing authorities after announcing insolvency. Yahoo Finance Live co-hosts Akiko Fujita and Rachelle Akuffo explain the Chinese shadow bank industry and its greater implications on China's property sector.

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This post was written by Luke Carberry Mogan.

Video Transcript

AKIKO FUJITA: There is a large Chinese property developers falling today.

Over the weekend, Beijing police launched an investigation into Zhongzhi Enterprise Group, a Chinese shadow bank.

That's according to local news.

This is reigniting fears that the country's real estate slump may be affecting banks.

Just last week, the shadow bank told investors it was severely insolvent, and its debt was huge.

Shadow banking refers to financial services offered outside the formal banking system.

Shadow banks can more easily lend money to more entities, but they're not subject to the same regulatory oversight as traditional banks.

And Rachelle, really this is about the concerns about the contagion effect spreading beyond the real estate sector into the financial sector.

And it's worth taking a step back for those who haven't necessarily been following the China story here about why shadow banking poses such a significant risk when you look at the overall Chinese economy.

The banking system, largely state run in China, which means that businesses that aren't necessarily backed by the state have a harder time getting loans, securing loans.

That's why the shadow banking-- shadow banks, I should say, have played a significant role in the massive growth that we have seen, particularly in the real estate sector.

But just as quickly as they've gone up, the concern is how quickly they can come down.

And we should point out China's been trying to crack down on shadow banks for many, many years.

But this is really just reignited the very risk that China watchers have been honing in on for many years.

RACHELLE AKUFFO: It's true.

And it certainly seems to be coming to a head here.

I mean, when you think of China's property sector accounting for about a quarter of its economy, when you think of the domino effect from a lot of this debt, a lot of these developers holding this debt, it means that consumers who have seen a slowdown in what they're looking at with real estate.

In fact, as we look at some data from McKinsey, they did a correlation between in their China consumption the start of a new era survey, tracking the slowdown in residential property transactions alongside the drop in consumer confidence.

Now some of that also factored in things like geopolitical conflict as well.

But it does mean that when people don't feel confident that they can buy a home as a way to build their wealth, they start pulling back as consumers.

And so when you look at some of the most exposed multinational companies that are exposed to China, you're thinking Apple, NVIDIA, Broadcom, Nike, Starbucks.

So some concern in the short-term, but analysts seem to see some long-term optimism, at least in the consumer-driven economy that China is having.

But that domino effect it still keeps lingering.

It still keeps rearing its head.

So you have to wonder if a shock to the system that perhaps the PBOC or the government can try and support this property market better.

But it still keeps becoming that nagging issue, that especially multinational companies have to stay on top of.

AKIKO FUJITA: Yeah.

And there's a lot of debate among China watchers about really how this trickles out beyond China.

We always hear people use that word Lehman moment.

That's not necessarily could argue what's happening here because that trickle out effect going out from China, still a little unknown.

But worth noting when we're talking Zhongzhi, specifically, this shadow bank, $64 billion in liabilities is what the company has flagged already.

That came out last week.

The shadow bank industry as a whole, some estimates put that at $3 trillion.

So that is a huge, huge exposure.

And a lot of that exposure is going into the real estate sector.

So something to very closely watch moving forward here.