Chinese authorities said that they recently opened criminal investigations into the money management business of Zhongzhi Enterprise Group, days after the embattled shadow banking giant revealed a shortfall of US$36.4 billion in its balance sheet.

Police in Beijing said in a statement on WeChat that they took “criminal mandatory measures” against multiple suspects, identifying one by the last name Xie. They urged investors to report cases or provide leads to the authorities, including filing complaints online. Xie Zhikun, the group’s founder, died in 2021, but several of his relatives are currently executives at the company.

The statement didn’t elaborate on what the measures entail or what crimes they may have committed.

The legal terminology used to describe the situation was similar to that in the case of China Evergrande Group’s billionaire chairman Hui Ka Yan. Evergrande said in September that Hui was suspected of committing crimes.

The mandatory, or coercive measures, can take several forms, including summons, release on bail and residential surveillance, detention and arrest, according to the Chinese procedure law. The measures can be enforced by the police, courts or prosecutors.

Prior to China Evergrande’s Hui, similar measures were taken against some staff of the money management business of the developer at the centre of China’s property crisis, according to a police statement in September.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Severely insolvent

Privately owned Zhongzhi last week revealed the depth of its financial difficulties, telling investors that it is “severely insolvent” with a shortfall of US$36.4 billion.

The wealth manager said liquidity has dried up and the recoverable amount from asset disposals is expected to be low, according to a letter sent to investors on Wednesday and seen by Bloomberg News. 

Zhongzhi first triggered concern in August after one of its trust-company affiliates failed to make payments to customers on high-yield investment products. The group’s financial difficulties add to President Xi Jinping’s challenges as officials grapple with a property crisis and a weak economy.

The firm said the death of its founder Xie and the subsequent departure of senior executives had led to a failure of internal management. Previous efforts at a “self-rescue” didn’t meet expectations, according to the Nov 22 letter.

Those affected by Zhongzhi’s troubles are likely to be wealthy individuals. Shadow banks such as Zhongzhi are loosely regulated firms that pool household savings to offer loans and invest in real estate, stocks, bonds and commodities. In recent years, even as rival trusts pared risks, Zhongzhi and its affiliates, especially Zhongrong International Trust, extended financing to troubled developers and snapped up assets from companies including China Evergrande.

Authorities on Saturday called on Zhongzhi’s investors to “actively cooperate with the police investigations and protect own rights and interests through legal channels” to help retrieve the proceeds of the crimes and recover their losses. BLOOMBERG