China Huarong Asset Management Co., once a sought-after target for domestic and foreign investors, has become one of the most headache-ridden companies. Sources say the Communist government is working on a restructuring plan for Huarong, under which bondholders at home and abroad would bear significant losses. Huarong owes more than $40 billion in debt to foreign and domestic investors.
The New York Times reported on Sunday that two sources familiar with the government’s plan said the government is still in the early stages of a restructuring plan for Huarong and has not finalized a timetable for a full restructuring of its business. The government will likely inject some money into the new entity formed after the restructuring of Huarong, but does not plan to pay off all of its bonds through capital injections to break rigid payments on the principal of domestic and foreign bond investors and discourage people from investing in riskier Chinese companies.
As a core part of China’s financial system, Huarong is considered by some to be “too big to fail” unlike a handful of smaller banks and state-owned enterprises that have failed, the report said.
Born 20 years ago, Huarong is the largest of China’s four “bad debt banks” and has expanded its operations by financing companies in the energy, insurance and real estate sectors. Huarong used low-interest loans from state-owned banks to invest in high-risk, high-yield deals, and used its international arm to raise money from foreign investors. It owes more than $20 billion to foreign investors.
Larry Hu, head of China economic research at Macquarie Group, said it was too late for a major corporate restructuring.
Huarong is too big to fail,” he says. It is no longer the solution to the problem, but the problem itself.”
Huang Zhangkai, an associate professor at Tsinghua University in Beijing, said that “regulators and investors are playing coward’s game” and that “regulators are saying that the financial system will undergo some serious reforms. Investors are saying, ‘I bet you don’t have the courage to let this default happen because it will bring a crisis.'”
Huang Zhangkai said the false sense of security created by the Communist government bailout has led to an environment similar to that in the U.S. before the 2008 financial crisis, when investors thought they were safe when they bet on it.
The New York Times report suggests that the latest plan by the Chinese Communist government could disrupt the Chinese corporate bond market. The overall market for Chinese companies began to fluctuate last month as anxious investors began to consider the possible contagion effect.
Chinese companies owe nearly $500 billion in loans to foreign investors. A default by Huarong could lead some international bondholders to sell their holdings of Chinese state-owned corporate bonds and make it harder for Chinese companies to borrow money from foreign investors, a key source of financing for Chinese companies.
Concerned about Huarong’s ability to raise new capital, two rating agencies have placed it on “watch” notice, meaning its debt could be downgraded, making it more expensive for the company to raise debt.
Logan Wright, head of China research at consulting firm Rhodium Group, said there is no set response to such events. The challenge for Communist Party regulators, he argued, is to deliver on promises to clean up the financial system while preventing a potential collapse.
The Bloomberg report cited people familiar with the matter as saying that China Huarong has reached a financing deal with large state-owned commercial banks that could ensure it can repay its maturing bonds in full until at least the end of August. But judging from the market action on the bonds, the coordination by the Communist Party’s financial regulator on Huarong’s short-term liquidity is far from enough to allay market worries about the company’s long-term debt repayment prospects.
Spreads on dollar-denominated bonds of other large Chinese state-owned asset management companies (AMCs) widened after midday Tuesday, with spreads on China Cinda’s 3% coupon bonds due 2031 widening about 22 basis points from Monday as of 16:08 on May 18, and spreads on China Eastern’s 2.75% coupon bonds due 2030 widening more than 5 basis points, according to Bloomberg data.
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