Bloomberg
China’s very bad bank: inside Huarong debt debacle
(Bloomberg) – It’s been 11 weeks since Lai Xiaomin, the man once known as the God of wealth, was executed on a cold Friday morning in the Chinese city of Tianjin, but his shadow still hangs over one of the most dramatic corruption stories. to come out of China – a story that has now stirred nerves in the financial world. At the center is China Huarong Asset Management Co., the state-owned financial company that Lai hired until he became embroiled in a comprehensive crackdown on corruption by China’s leader Xi Jinping. From Hong Kong to London to New York, questions are burning. Will the Chinese government stand behind the $ 23.2 billion Lai has borrowed in overseas markets – or will international bond investors have to swallow losses? Are major state-owned enterprises like Huarong still too big to fail, as global finances have long assumed – or will these enterprises be allowed to stumble, just like anyone else? The answers will have major consequences for China and the markets in Asia. Should Huarong not repay its debt in full, the development would cast doubt on a core principle of Chinese investment: the supposed government that supports major state-owned enterprises, or SOEs. ” A standard at a central government firm like Huarong is unprecedented, ” says Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group. If he were to act, he would be a watershed moment for Chinese and Asian credit markets, the issue had not yet weighed so heavily. Huarong bonds – among the globally most held SOE debt – recently fell to a record low of about 52 cents on the dollar. These are not the cents of a dollar normally associated with companies that are deep in trouble, but they are virtually unheard of for an SOE. Fears of a short-term default eased on Thursday after the company allegedly prepared funds for the full repayment of S $ 600. Huarong plans to pay on the due date, according to a person familiar with the matter, who asked not to not be mentioned and discuss the private information. It is a drop in the ocean and will not be removed. investors’ concerns. By all accounts, Huarong’s domestic and foreign mortgage holders are equivalent to $ 42 billion. According to Bloomberg data, approximately $ 17.1 billion is payable by the end of 2022. Bad Bank was not supposed to be like that. Huarong was created in the wake of the Asian collapse of the 1990s to prevent another crisis and not cause one. The idea was to contain a heavy wave of bad loans threatening Chinese banks. Huarong would serve as a ‘bad bank’, a safe haven for the billions secured by loans to state-owned enterprises. Huarong, along with three other bad banks, swapped debts for interests in hundreds of large state-owned enterprises and helped in the process. Chronic money losses such as the giant China Petroleum & Chemical Corp., after Lai took over in 2012, Huarong sought more to leverage investment banking, trusts, real estate and make him a key player in China’s $ 54 trillion financial industry position. Before long, global banks came knocking. In 2013, for example, Shane Zhang, co-head of investment banking services in Asia and the Pacific at Morgan Stanley, met with Lai. According to a statement he posted on Huarong’s website at the time, Zhang said he was “very optimistic” about Huarong’s future. Before Huarong went public in Hong Kong in 2015, he sold a $ 2.4 billion stake to a group of investors, including Warburg. Pincus, Goldman Sachs Group Inc., and Malaysia’s Sovereign Wealth Fund. BlackRock Inc. and Vanguard Group also acquired a lot of inventory, according to data compiled by Bloomberg. The stock has plummeted 67% since its listing, and Lai has had no trouble financing his big ambitions. A big reason: Everyone thought that Beijing would always stand behind an important company like Huarong. It easily borrowed money in the foreign market at a rate of as low as 2.1%. It borrowed even more in the domestic interbank market. Along the way, Lai Huarong transformed into a powerful shadow lender, extending credit to companies that turned down banks. The truth was darker. Lai, a former senior official at the country’s banking regulator, handed out loans with little oversight from his board or risk management committee. One Huarong credit official said Lai personally pronounced the shots on most foreign corporate loans endorsed by her division. according to an executive at a state bank, it has flowed into projects disguised as parts of China’s railway to build railways, ports and more around the world. Huarong did not immediately respond to questions about his lending practices. Given Lai’s fate, both people talked about the condition of anonymity. Huarong has accumulated more than half of the 510 billion yuan in emergency debt sold by Chinese banks in 2016. a highlight, Lai’s vast empire had nearly 200 units at home and abroad. He boasted in 2017 that Huarong, after reaching the Hong Kong Stock Exchange, would soon appear on mainland China as well. The IPO never happened. Lai was arrested in 2018 and subsequently pleaded guilty to a series of economic crimes in a state television program. He spoke of the cargo of cash sent to a Beijing apartment he called “the supermarket”. Authorities said they discovered 200 million yuan there. Expensive real estate, luxury watches, art, gold – the list of Lai’s treasure continued. Last January, Lai was convicted by the Secondary Intermediate People’s Court in Tianjin of accepting $ 277 million in bribes between 2008 and 2018. He was placed dead three weeks later – a rare use of the death penalty for economic crimes. Some accepted the execution as a message from China’s leader, Xi Jinping: my suppression of corruption will continue. At Huarong, the bottom sank. Net income fell by 95% from 2017 to 2019 to 1.4 billion yuan, and then fell by 92% in the first half of 2020. Assets shrank by 165 billion yuan. The company announced on April 1 that it would delay its results for 2020, saying its auditor needed more time. The influential Caixin magazine this week openly speculated about Huarong’s fate, including the possibility of bankruptcy. Its credit outlook is rated by all three top rating firms for a possible downgrade. According to people familiar with the matter, Huarong has proposed a comprehensive restructuring. The plan involves downloading non-core businesses that are losing money. Huarong is still getting a grip on what the businesses are worth. The proposal, which the government will have to approve, helps explain why the company has delayed its 2020 results, people say. Managers of the company have been meeting with peers at state-owned banks for the past two weeks to alleviate their concerns, a Huarong official said. The Chinese Ministry of Finance has raised another possibility: the transfer of its stake in Huarong to a unit of the country’s sovereign wealth fund, which could then solve the various debt problems. According to the people familiar with the matter, regulators held several meetings to discuss the company’s situation. In an email response to Bloomberg’s questions, Huarong said he had “sufficient liquidity” and planned to announce the expected date of his 2020 release of revenue after consulting auditors. The Chinese banking and insurance regulator did not immediately respond to a request for comment on Huarong’s situation. The company plans to help a note that was repaid this month recover its bonds from record lows Thursday. However, it is not just about the cost of financing, says Thu Ha Chow, a portfolio manager at Loomis Sayles Investments Asia in Singapore. For Huarong to have access to the market, a ‘clear and definite commitment’ from the Chinese Ministry of Finance to foreign debt or a clear restructuring will be needed. One thing is for sure: Huarong is part of a much bigger problem in China. State-owned enterprises owe $ 4.1 billion in debt and a growing number of them are struggling to stay up to date with creditors. In total, SOEs rejected a record 79.5 billion yuan of local bonds in 2020, which according to Fitch Ratings increased their share of the country’s payment failures to 57%. The figure rose to 72% in the first quarter of 2021. The shock waves of Huarong and these broader debt problems only began to resonate through the Chinese finances. The dismantling of all or part of Lai’s old empire would show that Beijing is willing to accept short-term pain to fuel financial discipline among state-owned enterprises. The irony is that Huarong was supposed to solve China’s big debt problem, not cause a new problem. “Failing a state financial institution tasked with solving problems in China’s financial system is the worst way to deal with risks,” said Feng Jianlin, a Beijing analyst at the FOST Research Institute. . “The authorities must consider the enormous consequences for the risk spread.” (Updates with Loomis Sayles’ comments in the last section) For more articles like this, please visit us at bloomberg.com. Sign up now to stay ahead of the most trusted business resource. © 2021 Bloomberg LP