China may be on the cusp of its Lehman moment because Zhongrong International Trust, a significant firm in the $3.7 trillion shadow banking universe, has been ruled insolvent. Formerly overseeing $108 billion, the fall has destabilized China’s rich elite and caused tremors in the financial markets.
More than 30,000 investors and 2,000 institutions are now poised for severe losses. A minimum of 162 high-yield trust products defaulted in 2024 alone, revealing profound weaknesses in the shadow finance regime.
The authorities have refused to bail them out, a shift toward tighter market discipline—but with investor confidence the price. The crisis risks shattering China’s consumer rebound, halting economic growth, and testing the stability of its financial system.
What are shadow banks and trust companies in China?
Shadow banks exist outside China’s conventional banking system. They gather funds from deep-pocketed investors and invest them in high-risk areas, including real estate. Trust companies are the key players in this system, with rapid expansion during economic boom in China.
These firms previously flourished by lending to property developers and local governments. Today, with the collapse of the property market, they are exposed to huge risks.
Zhongrong’s collapse: What went wrong?
Zhongrong oversaw $108 billion in 2022 but defaulted on 250 billion yuan ($35 billion) of trust products, which are mostly tied to underperforming real estate holdings. The parent company, Zhongzhi Enterprise Group, also went into bankruptcy in late 2023.
One of China’s Largest Shadow Bank -With $108 Billion In Assets In 2022- is being unwound
“Zhongrong International Trust Co., one of China’s largest shadow banks before it defaulted on billions of dollars of wealth products, is facing liquidation after its two state-appointed… pic.twitter.com/OnIf0b4So8
— kristen shaughnessy (@kshaughnessy2) April 15, 2025
The downfall of the trust company has had an impact on more than 30,000 investors, most of whom were from China’s elite class. State-appointed custodians now have declared Zhongrong insolvent and are proceeding with liquidation.
Why is this different from the past?
During past financial crises, Beijing would normally step in with bailouts. Yet this time, the administration has let investors share the cost. Authorities are closing down risky lending, banning implicit guarantees, and raising capital requirements.
Though this is a move toward more financial discipline, it has also created investor uncertainty, with many wondering whether or not the system is stable.
Risk of Contagion
Until now, over 162 high-return trust products have defaulted in 2024. Over 600 billion yuan in assets are still under threat. Consequently, high-net-worth Chinese investors are reducing their spending, which harms domestic consumption.
This is a significant challenge to the government, which has relied on consumer expenditure to drive economic recovery.
Not a Lehman repeat, but still alarming
Most compare Zhongrong’s downfall to the 2008 collapse of Lehman Brothers. Both were entrenched in the financial system and were plagued by reckless lending. Yet China’s case is unique. The nation’s financial system is heavily regulated and state-dominated, providing regulators with more instruments to control risk.
In addition, this crisis is developing slowly, so it is a “gray rhino” and not an abrupt “black swan” like Lehman.
Crisis of confidence, not capital alone
The worst consequence of Zhongrong’s failure might not be in dollars lost, but lost faith. For decades, China’s rich investors took implicit state guarantees for granted. The collapse of Zhongrong explodes that delusion.
That the government let investors bear the losses indicates potential financial shocks in the years ahead may be investor-financed too. Such a change might alter the path of wealth through China’s financial system over the next few years.
