It has been rumored that the central bank of the Communist Party of China is going to spend 100 billion RMB to bail out China Huarong Asset Management Company Limited (China Huarong, Huarong) in order to help Huarong repair its balance sheet. Some professionals expect that defaults by state-owned enterprises will become more common.
A number of RTHK media quoted Bloomberg as saying on April 21 that a person familiar with the matter disclosed that the central bank of the Communist Party of China plans to acquire some of Huarong’s nonprofit assets, which have a book value of more than 100 billion yuan (RMB), through its management of Chengfang Huida, in the hope of easing bond market concerns about further deterioration of the Huarong incident. But the proposal is still being finalized, and further details were not immediately available.
Another person familiar with the matter said that Huarong International, the offshore financing platform of Huarong, is divesting tens of billions of yuan of non-performing assets to other Huarong Overseas Investment Holdings Co.
Huarong is one of the most systemically important companies outside of the mainland’s state-owned banks and has extensive links with other financial institutions, with a current debt of $1.6 trillion and a 61 percent stake held by the Communist Party’s Ministry of Finance. Therefore, how to deal with Huarong’s 100 billion non-performing assets crisis has become a point of view for international financial markets to observe whether the Chinese Communist authorities continue to support state-owned enterprises.
Apple Daily quoted senior investor Lin Yiming’s commentary on the 22nd, saying that the amount of Huarong bonds is very large, and most of the acquired non-performing assets come from state-owned enterprises, especially state-owned enterprises or banks that have been operating in general for many years, which may not be able to collect bad debts and sell them to Huarong at a low price, so they have a lot of involvement with each other.
There are also comments that the CCP central bank had to help because of the fear that China’s financial market would be dragged down by Huarong. Economic analyst Luo Jiacong believes that if Huarong has the ability to repay its debts or creditors are willing to delay the collection of money, generally can be resolved internally, but this time Huarong is unable to set things right, the central government, if not bailout, fearing that “a wide range of involvement, a burst pot good big wok.”
For Huarong more than 100 billion of non-performing assets, Luo Jiacong believes that the company’s asset and liability management is not doing well, Huarong is not always a formal bank, the regulator did not keep a close eye on, so corporate finance may not do a good job, leverage, etc., so that the risk increases.
For mainland state-owned enterprises from last year, frequent defaults, Fitch Ratings China Corporate Research Senior Director Huang Shiao-ting said, each year, state-owned enterprises default cases are maintained in single digits, but this year, liquidity contraction, resulting in the first quarter of this year, state-owned issuers have defaulted, more than the level of last year. With the expiration of the transition period of the new mainland capital management regulations, the regulatory authorities hope to break the “rigid payment” of SOE credit bonds in an orderly manner, and defaults are expected to become more common.
Huarong, formerly known as China Huarong Asset Management Company, was established in 1999 as a central enterprise to deal with the non-performing assets of ICBC, and was listed on the main board of the Hong Kong Stock Exchange on October 30, 2015 as a large financial group with banking, securities, trust and other financial licenses. After its former chairman Lai Xiaomin was investigated, the group broke out in a series of debt crises.
Huarong’s stock trading has been suspended since early April this year due to the delay in issuing annual results, triggering fears about Huarong’s operation and financial situation. The panic spread to Huarong’s other U.S. dollar-denominated bonds, some of which were once cut in half due to concerns that a number of bonds due to mature in late April would not be paid, including a 915 million yuan bond and a 600 million Singapore dollar foreign debt due on April 27.
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