China’s Huarong Asset Management Company, created 20 years ago to dispose of the bad assets of China’s big state-owned banks, is facing unforeseen difficulties. The April 2018 execution of Lai Xiaomin, who was sentenced to death for corruption and bigamy, was a blow for the troubled state-owned asset management company. Lai oversaw the company from 2012 till January 2018.

Initially the markets took the news of his execution in its stride. However, the failure of the company to release its 2020 results by the March 31 deadline shook the markets. A recent report by Caixin, a Beijing-based media house known for investigative reporting, mentioned that the troubled firm will be restructured. This sparked a storm of debate resulting in a dip in the company's bond trading at 57 cents to a dollar from a high of 102 cents a dollar.

Huge Outstandings

According to Bloomberg, as of June, the asset manager sat on 1.6 trillion yuan of debt and one-third of its 1.7 trillion yuan of assets is long overdue. The Chinese government, the majority stakeholder in the company, has been trying to sell the company’s non-core assets for three years and has been rather unsuccessful.

Repayment Commences

Despite its troubles, Huarong has transferred funds to repay a $300-million note maturing on May 20, the first dollar bond to come due. The New York Times wrote that China is planning an overhaul that would inflict “significant losses” to both domestic and foreign China Huarong bondholders.

Huarong has also firmed up funding agreements with state-owned banks to ensure it can repay debt through at least the end of August. With this breather, China Huarong aims to complete its 2020 financial statements, a Bloomberg report stated.

Moody’s and Fitch Downgrade Bonds

Despite repayments and assured statements, the bond market investors are a worried lot. The way Beijing is handling this issue has made Moody’s Investor Services downgrade Huarong by one notch to BAA1 and Fitch by three notches to BBB after dropping the perpetual bonds of the company to junk territory.

Govt Steps in

Last month, The China Banking and Insurance Regulatory Commission (CBIRC) had stepped in and asked lenders to extend China Huarong’s upcoming loans by at least six months. The central bank is expected to pump in more than 100 billion yuan ($15 billion) to help clean up the firm’s mess.

Govt is the Majority Shareholder

China’s finance minister is the majority shareholder in Huarong with 57 percent stake in the troubled asset management company. Investors were confident that Beijing would support Huarong, resulting in the company going public in 2015.

Before it went public, Lai sold a $2.4-billion stake to a group of investors, including Warburg Pincus, Goldman Sachs Group Inc, and Malaysia’s sovereign wealth fund. Others who joined the bandwagon were BlackRock Inc and Vanguard Group. Currently, the stock has collapsed by 67 percent of its listing price.

Quick Clean up Needed

Despite the company’s offshore financing unit returning to profitability and the CBIRC claiming there is enough liquidity, banks have been told not to withhold loans to Huarong. This means the company is still in a mess. It needs to be cleaned quickly and to make matters worse, the government is not stepping in to save the bad bank from going bust.

(Edited by : Shoma)

First Published:May 19, 2021 4:48 PM IST