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China regulators try to ease doubt on Huarong amid talk of rejig

(ATF) Chinese banking regulators rallied on Friday to try to quell investor doubts about Huarong Asset Management Company, which is struggling to pay bond debts in the short and medium-term. They say the company is operating normally and has plenty of liquidity.

The government has been urging banks not to withhold loans to the state-owned Huarong, one of the biggest managers of distressed assets in China. The Ministry of Finance is its largest shareholder.

Officials are trying to stabilise its cash flow and reduce the risk of market contagion, sources have told Reuters.

There has been speculation that Huarong is on the verge of a major restructuring and this is one reason why investors have been spooked by official silence of the company in recent days, media reports in China have said.

Asia Times Financial reported two days ago that China’s Finance Ministry might shift a stake it holds in Huarong to a unit of the nation’s sovereign wealth fund – Huijin, a subsidiary of China Investment Corporation.

This news helped to slow the pace of bond selling, but concern over the details of government support for ailing financial firms such as Huarong and potential haircuts that inflict losses on bondholders caused further nerves in the market this week.

Huarong has seen an offshore bond selloff and a suspension in its shares since March 31, after it announced a delay in its earnings report due to a “relevant transaction” yet to be finalised.

China has been promoting deleveraging, and recently stated that any local government financial instruments that have difficulties in repaying debts should be reorganised or liquidated. Analysts expect that as Beijing tightens credit and attempts to eliminate the hidden banking business behind government-affiliated entities, default rates will rise.

But they say Beijing does not want to see the crisis spread – or to damage people’s confidence in China’s offshore bond market, especially when foreign investors are flooding into China. 

Investors have been looking for signs on whether Beijing will bail out an institution that was once important in China’s financial system. Huarong has also been a major issuer in the offshore bond market.

The debt crisis is the latest saga for a group plagued by trouble – failed investments and expanded businesses have forced it into restructuring talks since 2018 and its long-time chairman Lai Xiaomin was executed in January after a widely publicised graft probe.

Outstanding offshore bonds

Huarong and its subsidiaries currently have outstanding offshore bonds worth $22.39 billion, according to Refinitiv data, with some $3.57 billion due to mature in 2021.

Today (Friday April 16), banking regulators said Huarong is working with auditors to complete the audit of its 2020 annual report as soon as possible. The company will disclose information following the completion of the audit, they said.

This news emerged from a China Banking and Insurance Regulatory Commission press conference on the operation of the banking and insurance industries in the first quarter. Xiao Yuanqi, the CBIRC’s vice chairman, said the operation of financial asset management companies is stable, and their main operating indicators and regulatory indicators are within normal and reasonable ranges.

Two weeks ago, on April 1, the CBIRC announced the delay of Huarong’s 2020 results, and its suspension from trading. The main reason given was that a relevant transaction had not yet been determined and the external audit agency needed more information and time to complete the review process. But it said, as a Hong Kong H-share listed company, Huarong strictly abided by relevant trading rules of the Hong Kong Stock Exchange, and truthfully discloses information in accordance with the law. 

Some subsidiaries, meanwhile, published their annual reports.

Then on April 9 and 13, relevant international rating agencies downgraded Huarong and its related companies and included them on a watchlist.

This morning (April 16), market news showed that Huarong Securities had transferred all principal and interest repayment funds of “18 Huarong C1” to China Securities. This also means that Huarong Securities has prepared a full amount of redemption funds to ensure full redemption as scheduled on the same day.

Investors, however, were concerned that any debt restructuring by the company could leave holders of its US dollar bonds unprotected and force an expensive reassessment of long-standing government support for Chinese state-owned issuers.

Market concerns

Mainland companies have over $600 billion of dollar bonds outstanding. Most of it matures over the next two years, according to Refinitiv data. So, prolonged uncertainty over Huarong’s fate could raise financing costs and posing risks to the country’s robust economic recovery. 

Market concerns have spilled over into other issuers and lifted the cost of insurance against a default in China’s dollar debt to its highest since October.

The CBIRC support comes as Huarong prepares to repay a 2.5 billion yuan ($382.84 million) exchange-traded onshore bond maturing on Sunday April 18, though investors do not expect the company to face difficulties with that bond. The yield on that instrument stood at 4.293% on Friday, according to Refinitiv data, down from 4.365% on March 31.

Huarong repaid two maturing onshore enterprise bonds with a combined value of 3.1 billion yuan on March 15.

The firm is also looking into the possibility of repaying its offshore debts that are due to mature with onshore funds, a measure that needs coordination and final approvals from the Ministry of Finance and the country’s foreign exchange regulator, one source told Reuters.

Huarong’s troubles began three years ago when then-chairman Lai was targeted in an anti-corruption investigation, and found guilty by local courts in the country’s biggest ever financial corruption case.

Since his fall, Huarong has been under an asset restructuring plan to clean up the massive pile of distressed debt amassed through investments under Lai’s tenure. As of mid-2020, Huarong had 160 billion yuan in net assets, and more than 30 billion yuan in loan-loss provisions.

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