Some investors thought the worst was over for China Huarong in late January. That was when the former boss of the “bad bank” Lai Xiaomin was executed for financial crimes, including soliciting Rmb1.8 billion ($277 million) of bribes (see WiC526). That was a Chinese record for graft.
Signs of bottom-fishing from investors were evident. The share price of Huarong’s Hong Kong-listed unit Huraong Asset Management (Huarong AMC) climbed more than 10% in a month. But the state-owned firm’s bond prices stayed stagnant, pointing to a more cautious mood among creditors.
The rollercoaster events of this month have only served to show that Beijing’s clean-up job at Huarong is far from over.
Concerns over Huarong’s financial health started to boil over anew at the beginning of April when Huarong AMC said in a stock exchange circular that the publication of its annual results for the year ended March 31 would be delayed. The reason: “a relevant transaction of the company is still being finalised” and auditors required more time and information to finish their work. Trading in the company’s shares has since been suspended.
On the same day Huarong held an online conference with analysts and investors. However, 21CN Business Herald reported that the meeting lasted a mere eight minutes and the company’s acting president Wang Wenjie only took three questions.
“What I want to say is, currently the company is doing business as usual, according to plans, and according to roles assigned by the central government for the AMCs [asset management companies] to serve the real economy and dissolve financial risks,” Wang said.
Huarong even stepped up its efforts to absorb soured loans in the banking sector, snapping up nearly Rmb180 billion worth of bad assets last year, or 40% of the market. The subtext: it has actually been doing a good job as a bad bank, the role required of it by the central government.
However, that hardly eased investors’ concerns. The price of Huarong’s bonds took a plunge to junk levels as panic spread. Financial regulators were tightlipped initially. Yet as fear began to spill over to debt securities of other financial SOEs – such as Huarong’s counterpart Cinda – the China Banking and Insurance Regulatory Commission (CBIRC) broke its silence on April 16 and assured investors that Huarong still has “ample liquidity”.
Huarong AMC’s 2019 annual report suggested the company had about Rmb1.7 trillion worth of assets. According to Bloomberg, the group has $6.5 billion worth of bonds maturing this year.
Speculation has continued over how the Chinese government might step in to repay more of Huarong’s debts. Caixin Weekly reported that a significant restructuring could be on the cards.
Bloomberg News had earlier reported that the government was considering a plan that would see a unit of the People’s Bank of China assume more than Rmb100 billion of Huarong’s assets. Details were lacking in both reports, although it looks inevitable that creditors will have to take a significant haircut on their bond investments – sharing some of the pain with Huarong AMC’s stockholders.
The worst scenario of all would be letting Huarong go under. This was the dire picture painted by Fitch, which cut the rating on Huarong to junk this week when all the warning signs were made public.
Yet on a brighter note, Huarong was able to repay $600 million of offshore bonds that matured this week. According to Bloomberg, the repayment came after ICBC, the country’s biggest lender by market value, offered a financing facility (something of an irony when Huarong was earlier mandated to absorb ICBC’s bad loans).
All in all, the message from Beijing seems to be that Huarong is highly unlikely to go bust. Yet how the Chinese government deals with the problems at its biggest bad bank will set the tone for other major restructurings in the bond market – such as that of Founder, an investment conglomerate backed by Peking University that is heavily indebted.
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