With a mess left behind by the death of Lai Xiaomin, Huarong is suffering from a debt crisis and there is speculation that it may even go bankrupt. As one of the four major asset management companies (bad debt banks) in China, Huarong announced on April 1 that it would postpone the release of its annual report, and the market was further worried about its risk.
On a cool Friday morning 11 weeks ago, Lai Xiaomin, known as the “God of Wealth”, was executed in Tianjin.
Bloomberg reported on April 15 that Lai’s death sent shockwaves through global financial circles: from Hong Kong to London to New York, the market asked: Will the Chinese Communist government cover the $23.2 billion Lai borrowed from overseas markets? Will international bond investors have to swallow their own bitterness? Is an important state-owned enterprise like Huarong still too big to fail, as global financial markets have been thinking? Or will they just watch it collapse like every other company?
Owen Gallimore, head of credit strategy at ANZ, said, “It’s groundbreaking for a company with a government background like Huarong to default once it does.” Because if Huarong defaults, it will be a “watershed” moment for China and Asian credit markets.
Commerzbank Asia senior economist Zhou Hao said, “We originally thought that Chinese investment grade dollar bonds risk-free, high yield, the previous few bursts of lightning, the market did not react, we think that the accident is the opportunity to buy, the result was very bad this time the whole.”
Huarong’s dollar-denominated debt due April 27, 2022, was quoted down another 3 cents to 64/64.25 cents on Thursday, with the corresponding yield rising to 54.038%/53.549%; the dollar-denominated debt due April 27, 2027, was last quoted down to 60/60.75 cents, with the corresponding yield at 15.092%/14.828%.
ICE BofA Chinese investment-grade corporate dollar bond index hit a new high in February when data were available, then oscillated all the way lower, accelerating downward since last week to 212.756 on Thursday, down 1.13% for the week, and has fallen back 2.87% since its high on Feb. 11; the Chinese high-yield dollar bond index has fallen slightly slower, slipping about 0.64% so far this week, compared with the year’s high in early January, while falling nearly The index is down about 0.64% so far this week and nearly 2% from its yearly high in early January.
Bloomberg reported that not since the Asian financial crisis in the late 1990s has there been an event as risky as Huarong. In total, Huarong owes the equivalent of $42 billion to bondholders at home and abroad. About $17.1 billion of that will mature by the end of 2022, according to data compiled by Bloomberg.
Founded in 1999, Huarong Asset is one of the Big Four asset management companies and was listed on the main board of the Hong Kong Stock Exchange in October 2015. As a “bad debt bank,” Huarong aims to safely resolve the large amount of bad debt incurred by state-owned enterprises.
Like the other three bad debt banks, China Huarong swapped overdue debt for equity in hundreds of large state-owned enterprises. During this period, it helped Sinopec and other giants that had been losing money for years at the time to turn their losses into profits.
Lai Xiaomin, former party secretary and chairman of Huarong Assets, was previously tried for bribery, embezzlement and bigamy and sentenced to death for bribery, deprivation of political rights for life and confiscation of all his personal property. He was accused of illegally accepting property totaling more than RMB 1.788 billion equivalent between 2008 and 2018.
After Lai Xiaomin took office in 2012, Huarong expanded its business to include investment banking, trusts and real estate, establishing itself as a major player in China’s $54 trillion financial sector.
Shane Zhang, co-head of Morgan Stanley’s Asia Pacific investment banking business, meets with Lai Xiaomin in 2013. Zhang said Morgan Stanley was very optimistic about the future of Huarong, according to a press release on Huarong’s website at the time.
Market investors believe that the Chinese Communist government will always stand behind such an important company as Huarong, which has had a smooth ride in issuing debt financing in the overseas market with interest rates as low as 2.1 percent and borrowing a lot of money from domestic sources. In this way, Lai Xiaomin has turned Huarong into a huge shadow bank, providing credit to companies that are not well received by banks.
Lai Xiaomin was a senior official at the Communist Party’s Banking Regulatory Commission, and Huarong issued loans to the outside world with little inquiry from the board of directors or risk management committee.
A credit officer at Huarong said that Lai Xiaomin personally made most of the loans to offshore companies that their department made.
The money also flowed into domestic infrastructure projects packaged as railroads, ports and other global projects around the Belt and Road Initiative, according to a state-owned bank executive. Both of the above sources requested anonymity given that Lai Xiaomin was involved.
Huarong absorbed more than half of the RMB 510 billion in bad loans disposed of by Chinese banks in 2016. At its peak, Lai Xiaomin’s vast empire had nearly 200 subsidiaries at home and abroad. After landing on the Hong Kong Stock Exchange, he had threatened in 2017 to soon list in mainland China as well. However, Huarong’s return to mainland China for a listing did not materialize.
In 2018, Lai Xiaomin was arrested; in January this year, he was sentenced to death by the Tianjin Second Intermediate Court for taking bribes.
Huarong thus hit rock bottom, with net profit dropping 95% from 2017 to 2019, to RMB 1.4 billion, and another 92% in the first half of 2020. Assets shrank by RMB165 billion.
On April 1, Huarong announced that it would delay the publication of its 2020 results, saying that the auditors needed more time to complete the review process. The main concern for Huarong in the market now is the possibility of implementing a large-scale debt restructuring, or even bankruptcy. How the government is willing to bail out in the future and whether the disposal plan is satisfactory will directly affect the market’s confidence in Chinese investment grade USD bonds. The mainland media Caixin openly speculated on the fate of Huarong, including the possibility of bankruptcy.
Sources close to the matter said Huarong has submitted a proposal to regulators that includes divesting non-core and unprofitable subsidiaries to boost profitability; in addition, Huarong is determining the equity value of some subsidiaries and finalizing which ones will be eventually sold, which is part of the reason for the delayed release of results, and is still waiting for official approval of the proposal.
A Huarong leader said company executives have been meeting with state-owned banks over the past two weeks to ease their concerns.
The Communist Party’s Ministry of Finance is said to have raised another possibility: considering transferring its holdings to Central Huijin, a unit of sovereign wealth fund CIC. Regulators have held several meetings to discuss Huarong, people familiar with the matter said.
Recent Comments