As many as 545 of China’s 4,400 financial institutions have been designated by the central bank as high-risk for failure. Pictured, the office building of the Communist Party of China’s central bank.
Lai Xiaomin, the former chairman of China Huarong Asset Management, was sentenced to death, leaving behind a sticky mess. Recently, some Western media estimated that the financial woes of Huarong assets are feared to lead to a revaluation of about $100 billion worth of Chinese bonds. To make matters worse, a whopping 545 of China’s 4,400 financial institutions have been designated by the central bank as high-risk for failure.
On April 15, Reuters, Bloomberg, the Wall Street Journal and other Western media reported extensively on the financial crisis of China’s largest “bad debt bank”, Huarong Asset, and the regulation of China’s financial institutions.
The report said that after Huarong 2799.HK postponed the release of its annual report, the market was further worried about its risk, and Huarong’s dollar bonds continued to fall on the 15th, and the quotation of Huarong’s dollar bonds due on April 27 fell another 3 cents on the same day.
Huarong’s domestic bonds also weakened in tandem, with Huarong Securities Corp. bonds accelerating their decline in early April, rebounding after falling to 85 yuan from near 98.5 yuan, closing up 0.79% to 87.16 yuan on the 15th.
Commerzbank Asia senior economist Zhou Hao told Reuters, originally felt that Chinese investment grade U.S. dollar bonds risk-free, high yield, the previous several bursts of lightning, the market also did not react, all feel that the accident is the opportunity to buy, the results were rectified very badly.
Moody’s Investors Service, S&P Global Ratings and Fitch Ratings International have also warned that they may downgrade the ratings of bonds issued by China Huarong and its subsidiaries.
Reuters said that the main concern of the market for Huarong now is the implementation of large-scale debt restructuring, or even the possibility of bankruptcy, how the future government bailout will be, and whether the disposal plan is ideal, will directly affect the market’s confidence in Chinese investment-grade dollar bonds.
Owen Gallimore, head of credit debt strategy at ANZ, said the Huarong case could lead to a revaluation of about $100 billion worth of Chinese bonds, including some type of debt issued by state-owned enterprises and local government financing platforms. Whether or not the Chinese Communist Party will step in to rescue Huarong, it will still not eradicate potential concerns for the financial institution.
On January 5, the Tianjin Second Intermediate Court sentenced Lai Xiaomin to death on charges of bribery, embezzlement and bigamy. (Video screenshot)
Founded in 1999, Huarong Assets is one of the four largest asset management companies in China and was listed on the main board of the Hong Kong Stock Exchange in October 2015. By the end of June 2020, the company had total assets of more than RMB 1,731.5 billion and net assets of more than RMB 168 billion; it achieved total revenue of RMB 45.688 billion in the first half of 2020.
Lai Xiaomin, former Party Secretary and Chairman of Huarong Assets, was tried for bribery, embezzlement and bigamy and sentenced to death has been executed. Lai Xiaomin was accused of illegally accepting more than 1.7 billion yuan in property.
According to Bloomberg, such extreme behavior by the Chinese Communist Party is rare in any country. Yet mismanagement is common in China’s financial sector.
In 2020 alone, the CCP’s top banking regulator issued nearly 3,200 violations against institutions and 4,554 violations against individuals, ranging from executives to rank-and-file employees, levying fines totaling RMB 2.3 billion.
Among the violations, Communist Party investigators found fabricated financial statements, nannies and drivers of executives installed as controlling shareholders, and preferential interest rates and deals for investors and relatives.
Since first cracking down on financial corruption three years ago, the report said, the Communist Party has also bailed out three poorly run microfinance companies and merged dozens of others. But 12.4 percent of the 4,400 financial institutions are still designated by the central bank as high-risk for failure.
The Chinese government is currently rewriting the commercial banking law and will have “zero tolerance” for violations. The problem is that people don’t know if the governance problem is really under control, and that’s the big risk, the newspaper said, citing Asian economists.
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