Talking Point

The $7 trillion gorilla

Huijin is a critical plank in the world financial system. Ever heard of it?

Most Western policymakers, bankers and investors would greet mention of Huijin with a blank stare. Or perhaps a guess that it’s a form of martial art.

But though it is little known outside China, Huijin is a key player in the global financial system. An understanding of its history – and rather fuzzy mission – is key to trying to figure out the Chinese banking sector.

What is Huijin?

Central Huijin Investment – its full name – is the controlling shareholder in China’s six biggest banks (as well as owning various stakes in brokerage firms and insurers). So it sits at the heart of the financial system, collecting dividends on behalf of the government.

That explains its Chinese name. The two Chinese characters ‘hui’ and ‘jin’ directly translate into English as ‘gathering gold’. (It’s name is remarkably close to HSBC’s Chinese name, Huifeng, which can be translated as ‘gathering prosperity’).

Why and when was it set up?

HSBC’s Chinese name was coined in 1865; Huijin’s considerably later. It was established as part of the bank reform process in 2003. Back in the 1990s China’s banking system was regarded as a basketcase of monumental proportions due in large part to dud loans made to state enterprises.

In 1999 the government created four asset management companies to hive off the worst of the loans, and put the big four banks on the road back to profitability.

However, as 21CN Business Herald points out, stripping out the bad debt didn’t “improve corporate governance or establish new operating mechanisms”. Huijin’s job, says the newspaper, was to prepare the banks for their listings and convert them from “bad debt manufacturing machines into profit-making machines”. For example, it set them targets for return on assets.

In December 2003, the state injected $45 billion into Bank of China and China Construction Bank, and transferred its equity holdings to Huijin. It would also inject capital into ICBC and Bank of Communications with the same result in 2004. Huijin’s approach differed from earlier attempts to reform the banks: first it restructured the shareholding, then it brought in strategic investors, before finally arranging a Hong Kong IPO.

In 2005 the transition to listed companies began with flotations for Bank of Communications and China Construction Bank in Hong Kong. Bank of China and ICBC followed suit in 2006. The move diluted Huijin’s holdings, but it remained the controlling shareholder. As sector profitability grew, Huijin garnered substantial returns, insisting that 50% of net income be paid out by Bank of China, CCB and ICBC as dividends.

So it’s like a Sasac for the financial sector?

In our Talking Point in WiC45 we looked at the role of government holding company, Sasac. Also created in 2003, it holds stakes in blue chip firms like PetroChina and China Mobile.

Broadly speaking, Sasac’s mandate is industrial, whereas Huijin’s is financial. While Huijin was initially set up to house the government’s major banking stakes, it has now extended its tentacles into other areas of the financial system. In 2005 it injected capital into Galaxy Securities, and currently holds stakes in 10 brokerages; in 2007 it invested in China Reinsurance Group; and in 2009 became a bigger player in the insurance industry when it absorbed the equity of the troubled New China Life Insurance.

There is a key difference with Sasac. Huijin’s role lacks permanence. Sasac, somewhat like Berkshire Hathaway, is designed to act as a fund manager. The goal is to realise value from consolidating the state’s industrial holdings and growing them into champions. Huijin, on the other hand, is supposed to perform itself out of existence.

Huijin’s mission is to take troubled institutions and then reform them. When they are deemed ‘reformed’ (or fixed) it then transfers them elsewhere. For example, in 2008 it reached the view that Bank of Communications (of which HSBC is a major shareholder) was fully reformed and thus gave the stake to the Ministry of Finance.

So, in theory, once all the nation’s financial institutions have been reformed, Huijin will have served its purpose: all its assets will have been transferred and it can be wound up. Sasac will probably still be around.

But for the moment, the “Huijin family” ­– as China Business News terms it – encompasses a powerful chunk of financial firms. The newspaper estimates it controls over half China’s financial assets.

Has Huijin actively promoted bank reform?

That’s complicated. Since their IPOs all the major banks under Huijin’s wing have come a long way. They have invested in risk management systems and upgraded their IT, rejuvenated their retail branches and built their brands. ICBC even became the biggest bank in the world by market capitalisation.

However, while Huijin has ultimate management say, the local media doesn’t view it as an active shareholder akin to a private equity firm like KKR, TPG or Carlyle. “In the more than six years since its inception,” says China Business, “Huijin’s nature has failed to be clearly defined. Huijin is in a grey area between being a pure government agency and a quasi-commercial organisation.”

Its remit is woolly too. China Securities Journal says that in times of market stress – such as September 2008 and right now – Huijin buys bank stocks and acts like a “stabilisation fund”. And in October 2008 the State Council made plain Huijin’s inherent contradictions by designating it a “policy-oriented financial investment platform”.

The ‘policy’ bit is key – as seen during the financial crisis of 2008. The government made clear that the big banks were expected to lend. Were Huijin’s role narrowly confined to realising shareholder value and ensuring prudent management, it would not have allowed its banks to follow orders and lend Rmb9.59 trillion ($1.4 trillion). But with the government intent on bucking global recession in search of 8% GDP growth, Huijin went along with it.

And now?

It’s picking up the pieces. All the banks need to shore up their capital after ratcheting up their loan books. For example, Bank of China’s capital adequacy ratio finished the first quarter at 11.09%, versus a regulatory minimum of 11.5%. The Economic Observer reports that Huijin has announced it will participate in refinancing plans, and has cut the dividend payout it requires from 50% of profits to 45% to help the banks retain capital.

The problem, say the newspaper, is Huijin is “actually short of money” having pumped $19 billion into Agricultural Bank of China and given the Ministry of Finance Rmb100 billion. So the plan is to issue bonds and use the proceeds to recapitalise the banks.

In an added twist the newspaper predicts the buyer of Huijin’s bonds will be none other than the banks themselves – for whom the bonds will be zero risk-weighted. This may solve the banks’ immediate problem with capital, but it means Huijin will become more leveraged – shifting risk from one part of the financial system to another.

This elegant financing trick is necessary for another reason: dilution. Huijin does not want to become so diluted in the next round of capital-raising that its control slips. For example, it only holds 35.41% of ICBC and will not want to lose influence over the country’s biggest bank. You have the feeling Huijin could be issuing a lot of bonds – the Economic Observer reckons Rmb100 billion worth for starters.

Recent events lead to an unavoidable conclusion: the banks,

regrettably, have not been fundamentally reformed. They remain a critical policy tool for the government, ready to turn on the credit taps when required. Huijin has a mandate to ensure the banks operate to market principles and follow best practice, but being part of the political fabric that is only one of its many contradictory goals. To be fair to Huijin it has been given a mission that carries elements of the impossible.

As the bad loans rack up from 2009’s stimulus-inspired binge, Huijin will be keen to cover the tracks of this mission failure. After all investors still need to be persuaded to buy the IPOs of Agricultural Bank and Everbright Bank – and in the case of the former that’s an investment decision that hinges very much on the idea that the most troubled bank of all can be reformed and make sound loans.


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