Six months after taking office, Lai Xiaomin has been found guilty of corruption and executed, the fate of Huarong Asset Management, China’s largest bad debt manager, is no longer clear and the stakes for Beijing are growing.
One of the four state-owned management companies established in 1999 to clean up the debts of the banking sector after the Asian financial crisis, the turmoil in Huarong has deepened since Lai’s death.
The failure to release its financial accounts for 2020 and the uncertainty over the Rmb1.7tn ($ 261bn) of assets in its balance sheet have sparked wild fluctuations in the $ 22bn of dollar-denominated bonds the group has sold to international investors.
The prospect of $ 100 billion in debt from Chinese companies coming this year creates a further urgency to resolve the future of a group that, in the last decade, has left its roots as a firm manager of bad debts far removed.
“We don’t expect it, but if Huarong’s situation translates into a flaw, then what does that say about government support for other government-owned entities?” said Charles Chang, director of rating agency S&P. “If it is discovered that a defect or restructuring is occurring, we should take a look at all of them. [of them]».
Concerns over Beijing’s approach to companies it has set up to manage bad debts and troubled loans in China were amplified this month by the authorities. opened an investigation in Hu Xiaogang, vice president of China Great Wall Asset Management and former executive of China Orient Asset Management.
The Great Wall and the East, along with Cinda and Huarong, make up the quartet of bad debt managers. As with the bad banks set up in Spain and Ireland after the eurozone crisis, their goal was to take out troubled loans from the banking system – an ever-important function in China’s financial system.
But rather than shrinking in size as memories of the Asian crisis faded, asset managers launched a free-spin expansion that saw the four collect more than $ 100 billion from debt markets between the two sides. 2013 and 2018.
They all set their sights on China, but Huarong was by far the most aggressive. In 2015 alone, its international assets grew by more than 300 percent, according to S&P. In that year, it listed part of its operations in Hong Kong following strategic investments by Goldman Sachs and Warburg Pincus.
The firepower for Huarong’s overseas business, which the company has since blamed on Lai, came in large part from the $ 22 billion in debt denominated in dollars collected by its international arm.
“During the tenure of the former presidency, Huarong has expanded into several lines of business that do not have their core debt management mandate in trouble,” said Jason Tan, an analyst at CreditSights. This “led in the end to the fall of the chair and to an account for the company.”
Huarong’s foreign investments have helped Chinese companies gain access to credit across the continent. An example was its purchase in 2016 of dollar debt sold by China Aluminum, one of the world’s largest metal producers and not a financial company. Chinese companies often issue dollar-denominated bonds via Hong Kong, outside the country’s domestic financial markets, to exploit the demand of international investors.
It also bought bonds sold by Country Garden, a privately owned real estate developer that has become one of China’s best-known real estate companies in a sector now under pressure from Beijing to reduce its debts. In 2017, Huarong also helped developer Zhonghong Holdings acquire one $ 449 million stake in US amusement park operator Seaworld Entertainment.
In a period of seemingly uncontrolled growth that has seen its assets plummet seven times between 2012 and 2018, Huarong has established its own banking, brokerage, insurance and leasing companies, alongside a boost in property development.
Ronald Thompson, CEO of Alvarez & Marsal Asia, said bad debt managers have turned into “financial supermarkets” at a time when the country’s financial system is growing rapidly.
Huarong’s own expansion beyond its initial mandate was fueled in part by the fact that the assumptions of a company’s problems must have led it to participate in the enterprise.
«Induva [in] The United States, we would have high-yield lenders, we would have high-yield bonds, we would have private equity players, and asset management companies would have partially filled this role in China, ”Thompson said.
“If you’re an AMC boss.” [asset management company] and your future is to close it next year as it was originally intended, ”he added,“ perhaps not good for morale ”.
In a statement to the Financial Times, Huarong said that since 2018 he has “resolutely implemented the policies and decisions of the CPC Central Committee, the State Council and the regulatory authority,” and that he has ” reoriented its core asset management business in difficulty ”.
As Huarong’s dollar debt trades at distressed levels, the urgent question for investors and regulators is where the reckless growth left the group’s balance sheet.
The company, which is headquartered in Beijing, had only half of its assets in its “afflicted” segment, according to its 2020 interim report published last August and the latest available data. The report refers to other assets including loans and liabilities to companies in China.
Huarong International Holdings, the arm that issued debt in dollars, had total assets of HK 198 billion ($ 25.6 billion) in the first half of 2020, down one-third from 2017, according to CreditSights . They include stocks, convertible bonds, structured products and over-the-counter derivatives.
Although much less flashy, Huarong’s overseas ambitions – and his relaxation – carry echoes of HNA, Anbang and Dalian Wanda, a trio of privately owned Chinese conglomerates that have been licensed to hunt for trophy goods around the world. before a government crackdown in 2018.
HNA took years to fall, with creditors claiming only bankruptcy in January after a court ruled the high-flying group was unable to pay its debts.
While Huarong must play a crucial role on the Chinese mainland, particularly if national credit conditions tighten further, the next move belongs to Beijing.
“They’re probably trying to understand what the forum is about,” said one investor in Hong Kong. “Once they understand how big the forum is, they can make a decision on whether they want to fill that gap or not.”