When China Huarong failed to release its financial results last April, investors sought to read the political runes of the country’s largest bad debt manager.
Former company chairman Lai Xiaomin had been executed for corruption weeks earlier. In the absence of any official statement on Huarong’s results, investors began to question whether widespread expectations of government support were misplaced this time around.
Huarong, majority owned by the finance ministry and a major international borrower, had expanded far beyond its original remit under Lai’s tenure. It was suddenly a test of Beijing’s approach to business failure.
After months of uncertainty, a bailout has finally arrived. In August, the company disclosed record losses of $ 16 billion and in November, details of a $ 6.6 billion capital injection from a consortium of state-backed companies led by Citic, the financial conglomerate, have been unveiled. Last month he throw more assets.
Huarong’s story has since retreated from the limelight, eclipsed by a real estate crisis centered around private developer Evergrande. Its perpetual offshore bonds, which had fallen to 54 cents in May, are now trading near face value. But while some of the uncertainties have cleared, his case remains an example of the continued opacity of China’s rapidly changing financial system.
One of the most striking details of Huarong’s trajectory, which resonates in other parts of Chinese companies, is the expansion of its balance sheet. Originally one of four bad debt managers designed to contain the fallout from the Asian financial crisis of the late 1990s, its total assets grew from Rmb 315 billion in 2012 to Rmb 1.7 billion at the end of 2019. In its long-delayed 2020 annual report, this blame a “disorderly expansion” under Lai for his deviation from “his main responsibilities”.
This expansion came against the backdrop of an international shift on the part of Chinese companies, with now lapsed companies such as HNA and Anbang leading to an increase in the country’s foreign direct investment. Huarong has also moved away from simply buying distressed assets. In one case, it financed an offshore bond issued by Country Garden, China’s largest real estate developer. Huarong’s government-backed status reduced its borrowing costs in international markets – it borrowed around $ 20 billion from them, compared to $ 19 billion by Evergrande, the world’s most indebted developer.
But while Huarong’s case highlights China’s capacity for dramatic debt-financed growth, it also epitomizes the lack of transparency on exactly where the funds are going. Investors appear to be accepting the opacity due to growth, especially with the widespread lack of yields from bond markets elsewhere over the past decade.
And while the company’s biggest investor was the Ministry of Finance, it and other parts of the government may not know much about the asset allocation campaign undertaken by Lai. .
Huarong noted the reason for the delay in financial results was that his auditors needed more time and that a “relevant transaction” was being finalized. However, the lack of information regarding the entire Huarong episode from April onwards has led to speculation about the government’s motives.
The delay in releasing its results, for example, has been interpreted with caution by some investors as a deliberate signal from Beijing to make them rethink their assumptions about state support. The lag could also have been caused by many other factors, including Huarong’s hidden policy of solving problems or even the authorities’ own attempts to obtain information.
While often portrayed as a singular entity, the Chinese government may be more of a knot of competing political factions on issues like Huarong. This makes situations of over-indebtedness more difficult to read. While regulators have reformed aspects of financial services and asset management in China, the Huarong saga shows that the government will always temper market forces, especially in situations where it is directly involved.
“I wouldn’t say China is moving fast on market-based reforms based on what I’ve seen, certainly not for SOEs,” said Ron Thompson, restructuring expert at Alvarez & Marsal. “In almost all cases [of restructuring] the government has some semblance of involvement. This means that investors will have to keep trying to read the political runes in China.