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When the former president of China’s top distressed debt manager was executed in January, the focus had been on the 800 billion bribes he had been found guilty of taking.
The amount embezzled by Lai Xiaomin of Huarong Asset Management, of whom crimes including the abuse of the power to allocate credit and bigamy, it was the highest since the founding of the People’s Republic of China in 1949, according to the judge who presided over the case.
But investor attention has become an amount many times greater: the $ 22 billion in dollar-denominated bonds owed by the state-owned company.
A sale of Huarong bonds, which was triggered by the group’s failure to release its financial results in late March, has become a test case for the ever-present conviction that Beijing will always bail out state-owned companies that have loans in international markets.
“Regulators have to decide who to help and how, and while they decide, Western investors react with shock and horror, because suddenly it looks like a company owned by 61% of the Ministry of Finance hangs to dry” , said Andrew Collier, managing director of Orient Capital Research.
$ 260 billion
Huarong assets as of June 2020
Prices for some of Huarong’s bonds maturing in 2022 fell to 67 cents a dollar last week. They partially recovered on Tuesday after the Chinese regulator said late last week that Huarong’s operations were “normal,” according to local media.
The company’s securities branch said through the social networking platform WeChat that it had paid an outstanding onshore bonus over the weekend. According to Bloomberg data, large Western investors, including BlackRock, have invested in the company’s offshore bonds.
More volatility occurred on Tuesday evening in Asia, when Huarong dollar bond prices fell after U.S.-based research firm Reorg Research reported that Chinese regulators were considering a restructuring, citing familiar sources with the question.
Huarong International, the unit that issues or guarantees most of the group’s offshore debt, said the same day it had made profits again in the first quarter in a statement posted to WeChat.
The riots indicated the importance that markets attach to the Chinese government’s stance towards Huarong. The company did not respond to requests for comment.
The group is one of several large distressed asset management companies in China founded to clean up the banking system after the Asian financial crisis in the late 1990s. Since then, it has become a large conglomerate with Rmb1.7tn of assets as of last June, having aggressively expanded into areas such as real estate banking and investment.
The company has said it was mandatory to publish its financial results in order to complete a transaction without specifying further details. This has taken advantage of a wider uncertainty about the quality of Huarong’s assets and the business activities of his former presidency.
Lai Xiaomin, former head of state-owned Huarong Asset Management, attends Tianjin Second Intermediate People’s Court in January © CCTV via AP
Caixin, a respected Chinese business publication, reported around the time of Lai’s execution that its 100 properties in southern China were distributed to his ex-wife and lovers. According to state media, Lai had deposited Rmb300m in a bank account that belonged nominally to his mother and had stored tons of cash at his home in Beijing.
Chengxin Credit, a mainland Chinese rating agency, warned last week due to declining profitability and high business indebtedness, although it maintained a triple A rating. Western rating agencies have been left with investment grade scores in Huarong, but have issued similar warnings about their prospects or have put it under review for a rebate. S&P said this month that there was a “high probability” the company would benefit from government support.
The sale “serves to remind that a state-owned company that is a shareholder does not mean it assumes a sovereign risk,” said Michel Lowy, chief executive of SC Lowy, a troubled debt investor with a small position in Huarong bonds. “A few steps have been removed.”
Huarong’s health fears have been exacerbated by uncertainty about the assets he owns. “We are trying to do the due diligence to try to understand what assets were acquired and what their real value is,” Lowy added.
Concerns spread beyond Huarong. China Orient Asset Management, another bad loan manager, said last week that it was harder to dispose of delinquent assets in 2020 because of the coronavirus.
“What no one seems to be talking about is the other AMCs [asset management companies] it may be in trouble, “Collier said.” We just don’t know… there’s no transparency. ”
Media reports of a possible restructuring in Huarong have added to investor concerns.
“Any loss of Huarong bond instruments will not only affect the company itself, but will shake the foundations of proactive state support by the Chinese government on which the valuation of dollar bonds by Chinese financial institutions and other state entities, ”research firm CreditSights said in a note in April, though it added unlikely losses.
Beijing’s response to Huarong will likely take into account much more than the quality of the asset manager’s balance sheet, according to analysts.
The debacle in Huarong “could have negative repercussions on how the purchase of bonds in Asia is perceived globally,” Lowy said. “The level of control by investors may be higher,” he added, “and it should be.”
Additional reports of Sherry Fei Ju in Beijing
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