Troubled Chinese trust company brings in state help

The domestic asset manager last month failed to make payments on high-yielding investment products that it had sold to many companies and wealthy individuals. That sparked concerns that the country’s worsening property downturn was developing into a wider financial-sector contagion.

Zhongrong Trust acknowledged late Friday that it had missed payments on some products, and said it would bring in two large state-owned trust companies to help with operations and management.

“Due to multiple internal and external factors, some of the company’s trust products could not be paid on schedule," it said. Zhongrong Trust said it has engaged CITIC Trust, owned by state conglomerate CITIC Group, and CCB Trust, owned by China Construction Bank, to work with it for a year.

The asset manager indicated the arrangement isn’t a government bailout. It said the two state-backed firms won’t be responsible for paying for its trust products, and the arrangement could be terminated early or extended.

Since Zhongrong Trust’s troubles bubbled up around the middle of this year, investors have grown concerned that China’s $2.9 trillion trust industry could be the next casualty of the country’s property crisis.

Trust companies have long been a source of funding for Chinese real-estate developers. A tougher financing environment in recent years meant many privately owned developers were unable to secure loans from big banks to build residential projects. Trust companies filled some of that gap, providing loans at a higher cost to developers.

In 2022, Zhongrong’s trust funds had 11% of their assets in the property sector, according to the company’s annual report.

Missed payments started to pile up recently. Since August, at least 11 publicly listed companies in mainland China have said in stock-exchange filings that they didn’t receive interest or principal payments on products managed by Zhongrong Trust. Those missed payments add up to the equivalent of $82 million.

Some individual investors have also complained on social media that they had not received promised payments from Zhongrong Trust.

The full scope of its financial difficulties isn’t known. The privately held company had the equivalent of $108 billion in assets under management at the end of 2022.

Many of its trust funds had promised returns of around 6% to 8% annually, according to public documents for these funds seen by The Wall Street Journal.

Some of these trust products invest in bank deposits, stocks, corporate bonds and other kinds of wealth-management products. One of them, which was purchased by a listed company that supplies maintenance and repair tools, raised money in 2021 for developer Shinsun Property Group to fund the construction of a high-end residential project in the eastern city of Hangzhou, a tech hub south of Shanghai. Shinsun defaulted on its U.S. dollar debt last year after failing to make an interest payment.

Zhongrong Trust was founded in 1987. Its biggest shareholder is a state-owned company called Jingwei Textile Machinery, which last month said it wanted to delist its shares from Shenzhen Stock Exchange. The company cited “significant uncertainties in its operations" due to “market changes," without providing specifics.

Trust funds in China had about $155 billion in exposure to the property sector at the end of the first quarter, according to data from the China Trustee Association.  That portion is “under great threat," Nomura analysts said last month. Trust funds also have larger exposures to financial markets, which increases the risk of contagion, they said.

Write to Rebecca Feng at rebecca.feng@wsj.com