Wall Street executives might get the occasional death threat from livid investors, irate at losses in their portfolios. Over in China the risks for erring executives can be even more real: Lai Xiaomin, the former chairman of China Huarong Asset Management, was executed in February for soliciting bribes totalling Rmb1.8 billion. State media described his haul as the biggest since 1949 (see WiC526).
But just when analysts thought the worst might be over for Huarong, creditors and shareholders were rattled in April when the state-backed firm postponed the announcement of its annual results. This is usually a grim portent of problems ahead, although Huarong kept things vague, telling investors that the reason for the delay was that “a relevant transaction of the company is still being finalised”.
Outsiders only discovered the full depths of Huarong’s difficulties last week when it announced in another stock exchange circular that it had suffered a Rmb102.9 billion ($15.9 billion) loss in the last financial year (compared with a Rmb1.4 billion profit in the prior year).
To put that in perspective, Hainan Airlines, the A-share flagship of humbled aviation conglomerate HNA, had claimed the unwanted record for the worst annual loss for a listed Chinese firm in April when it posted a Rmb64 billion deficit.
The executed chairman is a convenient culprit to blame for the implosion in the company’s finances and Huarong claimed in its most recent profit warning that it was “constantly” reviewing and disposing of the riskiest assets accumulated by Lai’s “aggressive operations and disorderly expansion”.
Huarong is one of the four ‘bad banks’ initially set up to bail out the country’s ailing lenders in the wake of the Asian financial crisis. Although the institutions preferred to describe themselves as asset management companies – or AMCs – their initial purpose was clear: mopping up the worst of the sector’s non-performing loans. In Huarong’s case, the priority was to digest distressed assets from ICBC, China’s largest bank.
As the health of the banking sector improved, the four AMCs took on different business lines, including riskier activities like absorbing non-financial firms’ receivables (see WiC220). These shadow banking activities grew briskly, in part due to regulatory efforts to deleverage the mainstream banking system. For instance, indebted property firms cut off from more formal financing might turn to the likes of Huarong.
“It’s is not too far-fetched to suggest that Huarong has been stoking China’s own subprime crisis,” a financial blogger wrote on WeChat, referring to the imploding asset class that wreaked havoc on the global financial system back in 2008.
For investors concerned about the wider repercussions of Huarong’s difficulties today, there has been much anticipation about what happens next. The company’s shares were suspended in Hong Kong in April and prices for its near-term debt collapsed, with yields spiking at one point to nearly 50%.
It now seems that a group of state-owned financial firms including Citic Group, China Life Insurance and Cinda (one of the other original ‘bad banks’) has been marshalled into a bailout plan, the beleaguered Huarong announced last week. No further details have been offered on how a recapitalisation plan might be structured. But according to a report from Bloomberg, Huarong is poised to receive about Rmb50 billion in fresh capital as part of an overhaul that would shift managerial control to the giant conglomerate Citic.
Huarong shareholders (including the Ministry of Finance) look set to suffer a nasty loss, although creditors will be pleased to get some breathing space, at least for the moment. Beijing seems to have ordered the rescue because of fears that a wider default would be too disruptive, especially for borrowers in the dollar bond market. Other financial timebombs are still ticking away, however, including HNA, which postponed its submission of a restructuring proposal earlier this month as it could not agreed a deal with the larger state airlines, Caixin Weekly reported.
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