When the former chairman of China’s largest ailing debt manager was executed in January, the focus was on the Rmb1.8 billion ($ 280 million) in bribes he had been found guilty of.
The amount embezzled by Lai Xiaomin of Huarong Asset Management, whose crimes included the misuse of the power to distribute credit and bigamy, was the highest since the founding of the People’s Republic of China in 1949, according to the judge presiding over the case.
But investors’ attention has now turned to a number many times greater: the $ 22 billion in dollar-denominated bonds owed by the state-owned company.
A sell-off of Huarong’s bonds, triggered by the group’s failure to disclose its financial results in late March, has become a test case for a long-standing belief that Beijing will always save state-backed companies borrowing in international markets. .
“Regulators have to decide who they are going to help and how, and as they decide, Western investors are reacting with horror and horror because it suddenly looks like a 61 percent Treasury-owned company is being hung to dry”, said Andrew Collier, CEO of Orient Capital Research.
$ 260 billion
Assets held by Huarong as of June 2020
Prices of some of Huarong’s bonds due 2022 fell to 67 cents on the dollar last week, before recovering partially in the days that followed.
The company’s securities division said through social media platform WeChat that it repaid an onshore bond over the weekend. According to Bloomberg data, major Western investors, including BlackRock, have invested in the company’s offshore bonds.
Huarong International, the unit that issues or guarantees most of the group’s offshore debt, said the same day it had returned to profitability in the first quarter in a statement on WeChat.
On Wednesday, bond prices had partially recovered to 85 cents a dollar.
The upheavals highlighted the importance the markets attach to the Chinese government’s stance on Huarong. “At the moment, all the different activities of the company are normal, with sufficient liquidity. Our matured bonds are being redeemed on schedule, ”Huarong said in a statement to the The Washington City Times on Wednesday.
The group is one of many major ailing wealth management companies in China set up to clean up the banking system after the Asian financial crisis in the late 1990s. Since June, it has grown into a sprawling conglomerate with Rmb1.7tn of assets, following an aggressive expansion into areas such as real estate and investment banking.
The company said it was not required to disclose its financial results in order to complete a transaction without providing further details. This has increased uncertainty about the quality of Huarong’s assets and the business activities of its former chairman.
Caixin, a respected Chinese company publication, reported around the time of Lai’s execution that his 100 properties in southern China were being distributed to his former wife and mistresses. According to the state media, Lai had 300 million Rmb. Deposited into a bank account nominally owned by his mother and had tons of cash stowed away at his home in Beijing.
Chengxin Credit, a mainland Chinese rating agency, last week warned of the company’s declining profitability and high debt, although it retained a triple A rating. Western rating agencies have held on to the investment grade scores on Huarong but have issued similar warnings about the outlook or put it up for review for a downgrade. S&P said this month that it is “very likely” that the company would benefit from government support.
The sale “serves as a reminder that a state-owned shareholder does not mean taking a sovereign risk,” said Michel Lowy, CEO at SC Lowy, a troubled debt investor with a small position in Huarong bonds. . “There are only a few steps away from that.”
Fears about Huarong’s health were exacerbated by uncertainty about the assets it owns. “We try to exercise due diligence to try to understand what the assets were acquired and what their true value is,” added Lowy.
The concerns extend beyond Huarong. “What nobody seems to be talking about is the other AMCs [asset management companies] maybe in trouble, ”said Collier. “We just don’t know… There is no transparency.”
Media reports of a possible restructuring at Huarong have heightened investor fears. Tuesday night in Asia, prices of Huarong dollar bonds were hit after US research firm Reorg Research reported that Chinese regulators were considering restructuring, citing sources familiar with the matter.
Beijing’s response to Huarong is likely to take into account much more than the quality of the asset manager’s balance sheet, analysts said.
“Any losses on Huarong bond instruments will not only affect the company itself, but also shake the fundamentals of proactive government support from the Chinese government upon which the valuation of dollar bonds of Chinese financial institutions and other state-owned companies is based,” said research firm CreditSights. in a note in April, although additional losses were unlikely.
Additional reporting by Sherry Fei Ju in Beijing