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.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
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.
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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.