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Huarong’s State Rescue Seen Averting Risk of China’s ‘Lehman Moment’

Troubled bad debt manager at centre of bond selloff that spooked foreign investors sees debt values rise after announcing restructuring package

Image: Reuters.


(AF) The Chinese government has rescued the company at the centre of a bond scare that some feared would presage a rout similar to that which followed the Lehman Brothers collapse a decade ago.

Troubled bad debt manager China Huarong Asset Manager’s bonds jumped on Thursday after it announced a state-backed rescue plan.

The move appears to have assured the future of Huarong, whose perilous financial position became apparent this year when it looked set to default on a bond payment. That sparked a bond selloff in Chinese dollar debt on concern the major state-owned enterprise (SOE) would not be rescued by the government.

Contagion spread to other SOE bonds as investors bet that if Huarong – one of the country’s most strategic companies – wouldn’t be saved by the government, then neither would other firms they’d backed.

Observers said the collapse of Huarong, one of a handful of key SOEs, would have triggered systemic risks in the Chinese economy similar to the Lehman collapse, which sparked the 2008 global financial crisis.

Losses Warning

Wednesday’s announcement of a capital restructuring came a day after a meeting chaired by President Xi Jinping called for efforts to defuse systemic financial risks. It also comes as a flurry of regulatory crackdowns in China dent foreign investors’ confidence.

Huarong, which has not yet published its 2020 annual report, warned investors of an annual loss of 102.9 billion yuan ($15.85 billion), and said a state consortium led by the Citic Group Corp had agreed to make a strategic investment in the company.

Despite the profit warning, Huarong said its liquidity was ample and it could repay outstanding offshore debts in time, boosting its bond prices.

Full details of the restructuring plans have yet to be announced, but a dollar-denominated perpetual bond issued by China Huarong International, a Huarong unit, surged nearly 30%, according to data provider Duration Finance. About a dozen other Huarong International bonds rose more than 10%.

Bonds Jump

In Shanghai, a Huarong Securities bond maturing in April 2023 jumped 5%, according to exchange data.

Securities issued by China Evergrande Group, the country’s most indebted developer, also rose sharply, with a bond in Shanghai surging roughly 20%.

Li-Gang Liu, chief China economist at Citi, welcomed more clarity around Huarong‘s restructuring plan.

Allowing systemically important companies such as Huarong and Evergrande to default would “potentially trigger systemic risks, and lead to China’s ‘Lehman Moment'”, Liu said.

“In the stock market, foreign institutional investors are already asking themselves: are Chinese assets investible?” Liu said, referring to the rout in tech shares triggered by Beijing’s latest regulatory crackdowns.

‘More Confidence’

In the bond market, “the government should come forward and give the market more confidence. Otherwise, more foreign capital could be leaving China, which is not good for China’s economic stability and recovery.”

Huarong, one of China’s four state distressed debt managers, missed the March 31 deadline for filing its 2020 earnings, sparking a rout in its US-dollar-denominated bonds that spread to other Chinese issuers. Its former chairman was sentenced to death for bribery.

Huarong, which counts China’s finance ministry as its biggest shareholder, said late on Wednesday that it will issue new shares to Citic Group, China Insurance Investment, China Life Asset Management, China Cinda Asset Management and Sino-Ocean Capital Holding, without giving financial details.

The Beijing-based company said the profit warning mostly reflected a large change in provision for credit impairment.


  • Mark McCord, Reuters


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This story was updated with a new headline.

Mark McCord

Mark McCord is a financial journalist with more than three decades experience writing and editing at global news wires including Bloomberg and AFP, as well as daily newspapers in Hong Kong, Sydney and Melbourne. He has covered some of the biggest breaking news events in recent years including the Enron scandal, the New York terrorist attacks and the Iraq War. He is based in the UK. You can tweet to Mark at @MarkMcC64371550.


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