Six months after its chairman Lai Xiaomin was found guilty of corruption and executed, the fate of Huarong Asset Management, China’s largest bad debt manager, is not clearer and the stakes for Beijing are rising.
One of four public asset management companies established in 1999 to clean up banking sector debt following the Asian financial crisis, unrest in Huarong has worsened since Lai’s death.
The failure to publish its financial accounts for 2020 and the uncertainty over Rmb 1.7 billion ($ 261 billion) in assets on its balance sheet triggered sharp swings in the $ 22 billion denominated bonds in dollars that the group sold to international investors.
The prospect of $ 100 billion in Chinese corporate debt maturing this year injects added urgency into resolving the future of a group that, over the past decade, has left its roots as a debt manager irrecoverable far behind.
“We don’t expect it, but if Huarong’s situation results in a default, then what does it say about the government’s support for other government-owned entities?” said Charles Chang, director of the rating agency S&P. “If it turns out that a default or restructuring occurs, we will have to examine all [of them]”.
Concerns about Beijing’s approach to the companies it set up to handle bad debts and distressed loans in China escalated this month after authorities opened an investigation into vice president Hu Xiaogang. of China Great Wall Asset Management and former executive of China Orient Asset Management. .
Great Wall and Orient, along with Cinda and Huarong, make up the quartet of bad debt managers. Like the bad banks created in Spain and Ireland following the eurozone crisis, their goal was to take out distressed loans from the banking system – a still important function in the Chinese financial system.
But rather than downsizing as memories of the Asian crisis faded, asset managers embarked on a freewheeling expansion that saw the four raise more than $ 100 billion in equity markets. debt between 2013 and 2018.
All of them set their sights beyond China, but Huarong was by far the most aggressive. In 2015 alone, its international assets grew by more than 300%, according to S&P. That year, it listed part of its Hong Kong business as a result of strategic investments from Goldman Sachs and Warburg Pincus.
The firepower of Huarong’s overseas activity, which the company has since blamed on Lai, has come largely from the $ 22 billion in dollar-denominated debt raised by its international arm.
“During the former president’s tenure, Huarong expanded into many lines of business unrelated to his core tenure of troubled debt management,” said Jason Tan, analyst at CreditSights. This “ultimately led to the fall of the chair and a bottom line for the company.”
Huarong’s overseas investments have helped Chinese companies access credit beyond the mainland. One example was its 2016 purchase of dollar debt sold by China Aluminum, one of the world’s largest metal producers, and not a financially troubled company. Chinese companies frequently issue dollar-denominated bonds through Hong Kong, outside of the country’s domestic financial markets, to meet demand from international investors.
He also bought bonds sold by Country Garden, a private real estate developer who has become one of China’s best-known real estate companies in an industry now under pressure from Beijing to reduce debt. In 2017, Huarong also helped developer Zhonghong Holdings buy a $ 449 million stake in US theme park operator Seaworld Entertainment.
In a period of seemingly unchecked growth that saw its assets soar by seven between 2012 and 2018, Huarong established its own banking, brokerage, insurance and leasing branches, alongside a dynamic of real estate development. .
Ronald Thompson, managing director of Alvarez & Marsal Asia, said bad debt managers have turned into “financial supermarkets” at a time when the country’s financial system was developing rapidly.
Huarong’s own expansion beyond her original remit was fueled in part because taking on a company’s problematic debts ultimately led her to take stakes in the companies.
“Or [in] in the US we would have high yield lenders, we would have high yield bonds, we would have private equity players, asset management companies have partially fulfilled that role in China, ”said Thompson.
“If you are the boss of an AMC [asset management company] and your future is to shut it down next year as originally planned, ”he added,“ that’s probably 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 regulatory authorities,” and that he had “refocused on its core business, the management of troubled assets”. .
As Huarong’s dollar debts trade at troubled levels, the pressing question for investors and regulators is where the reckless growth has left the group’s balance sheet.
The Beijing-headquartered company had only half of its assets in its “distressed” segment, according to its 2020 interim report released last August and the latest data available. The report makes reference to other assets, including loans and debts to companies in China.
Huarong International Holdings, the branch that issued the dollar debts, had total assets of HK $ 198 billion ($ 25.6 billion) in the first half of 2020, down a third from 2017, according to CreditSights . They included equities, convertible bonds, structured products and over-the-counter derivatives.
While far less glitzy, Huarong’s overseas ambitions – and their outcome – echoed with HNA, Anbang and Dalian Wanda, a trio of private Chinese conglomerates who have been licensed to seek trophies around the world before. a government crackdown in 2018.
HNA took years to pull out, with creditors only filing for bankruptcy in January after a court said the once high-profile group was unable to pay its debts.
While Huarong is expected to play a crucial role on the Chinese mainland, especially if domestic credit conditions tighten further, the next step is Beijing.
“They’re probably trying to figure out what the hole is,” one Hong Kong investor said. “Once they determine the size of the hole, they can decide whether or not they want to close that gap.”