TheChek News Flow

Finance giant’s missed payments to investors fuel concerns of spillover effect from property sector slowdown

On a messaging platform hosted by the Shanghai Stock Exchange where investors can put queries directly to companies, the focus this week has been on missed payments from a sprawling financial conglomerate.

“Dear investor,” wrote chemical business Shanghai Chemspec in one of a dozen similarly worded reassurances from listed groups, “the company has not bought any wealth management products from Zhongrong or Zhongzhi.”

Zhongrong, partly owned by investment group Zhongzhi, is one of the biggest players in a $2.9tn shadow financing market, referred to as the trust industry. Doubts over its health have added to mounting concerns about the state of China’s economy, which is struggling to recover after the Covid-19 pandemic.

Two listed companies said last week Zhongrong had failed to repay trust products, which offer savers and companies higher returns than traditional banks. This followed weeks of speculation over separate missed payments to retail investors from Zhongzhi’s wealth management businesses, which also direct billions of renminbi into savings products.

“When the crisis was only concentrated around Zhongzhi wealth management companies, the market was not so panicked,” said Karen Wu, an analyst at CreditSights. With Zhongrong, “the crisis has actually accelerated”.

Given that shadow financing often flows into the property sector in China, the Zhongzhi group’s woes have fuelled deeper fears of spillover effects from a slowdown in the country’s once-booming real estate industry, which has already driven dozens of developer into default.

China’s trust industry typically “organises capital from companies and individuals” at higher rates than banks can provide, according to one former senior employee of a bank in mainland China. He added that trust companies in general “probably are overly exposed to real estate”.

Xiaoxi Zhang, an analyst at Gavekal consultancy, pointed to data from the China Trustee Association which showed Rmb1.1tn ($152bn) of Rmb23tn in trust products were invested in the property sector. He wrote that the true figure was “probably far bigger” given trust funds were often routed through multiple intermediaries to developers. There is also no data on trust lending to local government financing vehicles.

In light of missed bond payments last week from Country Garden, China’s biggest privately owned homebuilder, analysts at JPMorgan warned of “a vicious cycle on real estate financing, intensifying liquidity stress for developers and their non-bank creditors”.

The analysts added that Zhongrong had total assets of Rmb629bn, of which Rmb67bn was invested in the property sector. “There is no disclosure on the profile of real estate debtors,” they wrote. “We assume that all real estate-related debt is at risk.”

Zhang at Gavekal suggested that while regulators had cracked down on shadow banking, including its ability to finance property and its links to the conventional banking system, the missed payments at Zhongzhi were a sign “that debt strains from property developers and local government financing vehicles are spreading across China’s economy”.

Beijing-based Zhongzhi was founded in 1995 by Xie Zhikun, a rags-to-riches entrepreneur who built his wealth in timber and real estate. By the time of Xie’s death in 2021, it had stakes in six financial institutions and four wealth management companies, as well as a range of other commercial interests from mining to new-energy vehicles. He was replaced by Liu Yang, his nephew and formerly chair of Zhongrong.

Zhongzhi’s four wealth management companies, which Chinese media outlet Caixin has estimated hold trillions of renminbi between them, have also been at the centre of Chinese social media chatter. A letter of apology for missed payments from a representative of an investment business linked to Zhongzhi has circulated widely on the internet.

Zhongzhi did not respond to a request for comment. Zhongrong, which this week said criminals had “forged its corporate seal, official letters and other documents”, did not respond to a request for comment.

In an informal meeting with investors at Zhongzhi’s headquarters last week, a Zhongrong board member made clear the scale of the problem, according to two people who attended.

Three of the four wealth management companies stopped making payments in June, the board member told them, adding that Zhongzhi’s investments included listed companies, real estate projects, debts and other property assets in third- and fourth-tier cities. The fourth wealth manager subsequently stopped making payments, two investors said.

There are signs of a retail investor backlash.

In early August, police were called to the headquarters of Zhongzhi while retail investors sought to “resolve” issues with management inside. Investors and police at the scene declined to comment on any details. Retail investors on Wednesday sought to lodge formal complaints with authorities in Beijing.

A Yunnan-based investor in Zhongrong products told the Financial Times he was owed about Rmb6mn. “These are all hard-earned assets . . . But now I have lost everything,” the investor said.

One person, who asked to remain anonymous, said his parents had invested in Datang, one of Zhongzhi’s four wealth managers. They work at a power plant on China’s east coast where “almost 100 per cent” of employees had similarly invested. Investors had been told in early July that payments would be delayed for 10 days, but they had not received payment, he said.

“It is really crazy because they thought it was absolutely safe,” the person said. “No one has communicated with anyone who actually works for Zhongzhi.”

A document sent to Datang investors and seen by the FT outlines a 12-month product called “Zhongzhi Shicheng” that provides an 8 per cent return if up to Rmb3mn is invested.

One page of the presentation is devoted to Ripple, the US cryptocurrency, and describes it as a “classic case” without clarifying how much of the proceeds, if any, are directed towards it.

Wealth management products in China often “do not do proper disclosure about underlying assets”, said Wu at CreditSights, so investors “don’t know what [they] are”.

For Zhang at Gavekal, debt troubles in the real estate sector will “inevitably surface in other places, including at commercial banks”, if the “market slump continues”.

“If that happens,” he added, “Zhongzhi may yet come to be seen as the canary in the coal mine.”

NEW YORK, Aug 16 (Reuters) - ArcelorMittal SA (MT.LU), the world's second-largest steelmaker, is considering a potential offer for U.S. Steel Corp (X.N), people familiar with the matter said on Wednesday.

ArcelorMittal is discussing a possible offer with its investment bankers, and there is no certainty that will press ahead with it, the sources said. If it launches a bid, it could mark the escalation of a bidding war that is already underway for U.S. Steel, following offers from Cleveland-Cliffs Inc (CLF.N) and Esmark Inc for more than $7 billion.

The sources requested anonymity because the deliberations are confidential. Representatives for ArcelorMittal and U.S. Steel did not immediately respond to requests for comment.

A “super app” combining social media, payments, shopping and more would theoretically be a major step to unlocking social commerce and livestream shopping in the West, and Elon Musk says that’s exactly what he wants to build. He shouldn’t get his hopes up.

Elon Musk is taking his turn as the latest tech mogul to be taken in by the dream of building a “super app” where users share text, images and video but also do their banking, shopping and more.

The controversial and ongoing rebrand of Twitter to X is directly tied to Musk’s plan to build what he calls “the everything app,” a vision modelled on China’s WeChat, where users might watch videos, pay bills and buy handbags all within the app’s ecosystem. If Musk proves successful, it could create new opportunities for fashion e-commerce.

There’s good reason to be sceptical about his prospects. Western brands and retailers may harbour their own hopes of recreating the social commerce and livestream shopping seen in Asia, where those activities play an outsized role in driving sales. Western consumers, on the other hand, seem less enthusiastic about the concept. That’s because, the argument goes, being accustomed to a fragmented landscape of apps, they can find multi-function apps disorienting and unnecessary. Facebook has accumulated features, for example, including payments, but remains far from being an all-in-one app and couldn’t make live shopping work.

A series of tech entrepreneurs such as Mark Zuckerberg have fantasised about building a super app but none has yet succeeded. Nobody before had Musk’s resources and freedom from oversight, however. As of this writing, he’s the world richest person, and X is now a private company under his control.

He shouldn’t get his hopes up.

“[T]he window for super apps has closed,” Forrester, a technology research and advisory firm, declared in a recent report.

In Forrester’s view, the emergence of super apps like WeChat and Alipay in China, KakaoTalk in South Korea, Line in Japan and Paytm in India wasn’t just a matter of building the right product. It was also about timing. Each one launched to provide users a core service, like messaging or payment, and was the first to do so in its market, allowing them to grow without competition. From there, they quickly expanded into other essential services, including e-commerce, increasing their “stickiness” for users. Next they opened their ecosystems to third-party services that could further augment their uses.

Xiaofeng Wang, principal analyst at Forrester based in Singapore, said in an email that “the conditions for super apps to succeed are absent today, especially in the West.”

As much as tech entrepreneurs wish otherwise, there’s no consumer need for a super app in the US or Europe at this point. There’s more competition for services, too — just think of the number of payment options available, including Apple Pay, Google Pay, PayPal, Venmo and more. And Regulation in the West is much more stringent, especially these days as US antitrust authorities step up their scrutiny of Big Tech.

Companies may continue to successfully bundle some capabilities together, the way buy-now-pay-later firms such as Klarna are introducing apps that bring shopping directly into the BNPL ecosystem. But these apps are more likely to be “super-ish than truly super,” as the authors of a recent piece in Harvard Business Review put it.

Of course, fashion could still see its dream of abundant social commerce and livestream shopping realised without a super app. It would just take getting users to buy on social platforms and during livestream events. But even that has faced obstacles in the US. Instagram introduced livestream shopping in 2021, for example, only to pull the plug less than two years later.

“Our data shows that consumers in the US seldom purchase on social media and are not particularly interested in the livestream format,” Wang wrote.

Forrester found in a recent survey that 24 percent of online adults in the US use social media to make purchases at least weekly. That’s not a trivial amount, but it compares with 64 percent in China’s metro areas. In another survey last year, just 17 percent of online adults in the US wanted brands or companies to use livestreams on social media.

Many experts do expect social commerce to grow in the US. Insider Intelligence estimated in a 2021 forecast that US social-commerce retail sales would rise from about $37 billion that year to nearly $80 billion in 2025. TikTok is widely reported to be readying the launch of a US e-commerce marketplace that would see it selling Chinese-made goods in a bid to compete with apps like Shein and Temu, only with the company’s video capabilities built in. Plenty of fashion companies are still banking on social commerce as well.

Perhaps one or all will succeed. But if they do, it’s not likely to happen within a WeChat-style super app in the US.

‘Scale is important,’ executive says as environmental opponents slow new construction

US pipeline group Energy Transfer is set to buy rival Crestwood Equity Partners in a $7.1bn deal, the latest merger in the North American fuel infrastructure business as building new projects becomes more difficult.

The all-equity transaction would enable Energy Transfer — headed by Texas billionaire and Republican donor Kelcy Warren — to further expand its 125,000-mile network of oil and gas pipelines, already among the largest on the continent.

The so-called midstream energy sector has been engaged in a flurry of transactions as efforts to add pipeline capacity runs into opposition. Besides local landowners, environmental activists have sought to block new infrastructure that locks in reliance on fossil fuels.

Gas pipeline giant Oneok in May announced an $18.8bn deal to buy oil-focused Magellan Midstream Partners, though the takeover has faced some pushback from big shareholders. 

TC Energy said last month it would spin off its oil pipeline business two years after its plan to build the Keystone XL pipeline to carry crude south from Canada’s Alberta province was halted when US President Joe Biden pulled a crucial permit. 

Among the assets Energy Transfer operates is the Dakota Access crude oil pipeline, a target of staunch activist resistance before it finally connected North Dakota’s Bakken shale region to energy markets in 2017.

Energy Transfer’s growth has already been boosted by acquisitions: it announced the purchase of Permian Basin operator Lotus Midstream for $1.5bn in March, and in 2021 it snapped up Enable Midstream Partners for $7.2bn, among other deals.

Under the transaction announced on Wednesday, Crestwood shareholders would take a 6.5 per cent stake in Energy Transfer. The $7.1bn value of the deal includes $3.3bn in debt to be assumed by Energy Transfer. 

“Scale is important — I think everybody that’s involved in the business knows how important scale is,” said Robert Phillips, Crestwood chief executive, on a call with analysts on Wednesday. “The synergies I think are obvious any time you combine two companies like this.”

The deal will grow Energy Transfer’s position in the prolific Permian Basin oil and gasfields, which stretch across Texas and New Mexico, as well as the Bakken. It will also give Energy Transfer a foothold in Wyoming’s Powder River Basin. The company expects to save about $40mn in annual costs from the deal.

Energy Transfer said the new assets would allow it to funnel more hydrocarbons to its storage and processing facilities at Mont Belvieu, Texas, and to its export facilities at Nederland, Texas, and Marcus Hook, Pennsylvania. 

Energy Transfer shares rose 2 per cent in early trading on Wednesday. Shares in Crestwood gained 3 per cent.

“We view the deal as neutral for [Energy Transfer] as it expands its footprint in the Williston [Bakken] and Permian basins and adds the Powder River Basin,” said Elvira Scotto, an analyst at RBC Capital Markets, adding that shares were “likely to underperform given the all-equity deal”.