Why Did It Take So Long to Act on the Zhongzhi Meltdown?

Like many in internet finance, the now insolvent shadow banking giant lacked a traditional risk control system, exposing its high-net-worth clients to great jeopardy

On Nov. 25, authorities opened a criminal investigation into the money management business of Zhongzhi Enterprise Group Co. Ltd. It begged the question: What took them so long?

The sprawling financial conglomerate had raised enormous sums of money through its wealth management companies and invested the funds in a vast array of listed companies and other projects. But over the past few years, loss-making investments amid a stock market downturn, tightened regulations and a property market slump have crashed the de facto shadow bank’s balance sheet, leaving its units unable to repay investors.

Last month, Zhongzhi revealed in a letter to investors that it had a financial shortfall of up to 260 billion yuan ($36.5 billion) and was “severely insolvent.”

A few days back, I attended a high-level meeting of financiers and regulators that aimed to figure out ways to implement the goals of the financial work conference and remove risks to the financial system.

At that meeting, I mentioned it was strange that so many malignant issues go unaddressed until significant problems arise, causing immense harm to society. Why can’t such issues be dealt with before they reach such a damaging stage?

When the issues with Zhongzhi Group broke in the media a few months ago, I wrote a post titled “Everyone is pitiable, yet no one deserves sympathy,” and I still hold this view. Across many years, right from the beginning of the internet finance boom in China, I have believed that such models are unsustainable and carry significant risks.