China Huarong gets state-led bailout after $21.7b loss

BEIJING • Government-backed investors will recapitalise China Huarong Asset Management after the bad-debt manager posted a record US$15.9 billion (S$21.7 billion) loss, ending months of speculation over whether Beijing would deem the troubled financial giant too big to fail.

The rescue package unveiled on Wednesday suggests the government is, for now, unwilling to allow a default by one of China's most systemically important state-owned companies. It is likely to boost short-term confidence in China's US$12 trillion credit market, even as it raises concerns about the longer-term dangers of a financial system where implicit government guarantees have enabled years of reckless borrowing.

State-owned investors, including Citic Group, China Insurance Investment Co and China Life Asset Management Co will replenish Huarong's capital, the nation's biggest bad-loan manager said in an exchange filing on Wednesday. Huarong added that it has no plan to restructure its debt, reiterating that it has made preparations for future bond payments.

The statement confirmed a Bloomberg report that Huarong was poised to receive fresh capital as part of an overhaul plan, according to sources familiar with the matter, who put the amount being discussed at about 50 billion yuan (S$10.5 billion). Control of the company would shift to Citic, the people said, though details were still being finalised and could change.

The overhaul marks the government's first major attempt to resolve a crisis at Huarong that has roiled the world's second-largest credit market since April. The financial giant's plight has become the biggest test in decades of the Chinese authorities' willingness to support troubled state-owned borrowers amid a record wave of defaults.

"This is clearly a good signal that SOE support is still firmly in place when financial stability is at risk," said Mr Kamil Amin, a credit strategist at UBS Group, referring to state-owned enterprises. "For financial systemically important issuers, I think the notion of being too big to fail holds more than for property developers, for example."

Concerns have been swirling over Huarong's financial health and the lack of clarity on government support after the company delayed its earnings release. In separate exchange filings on Wednesday, it reported a preliminary 2020 loss of 102.9 billion yuan and said the board will approve the results for last year as well as interim 2021 results on Aug 28.

Huarong's dollar bonds were rallying yesterday morning to their highest levels since mid-April. The firm's 4.5 per cent perpetual note rose 5.8 US cents on the dollar to 96.5 US cents, Bloomberg-compiled data showed. That was up from a low of 50 US cents in May.

The details of the government's ultimate decision on Huarong will be scrutinised by investors for its broader implications. The effort to help the company make good on its US$242 billion of liabilities - including about US$21 billion of offshore bonds - would neutralise a potential systemic risk to China's financial system and make it easier for other state-owned borrowers to tap the credit market.

At the same time, the authorities may be wary of providing unconditional support. When asked about Huarong last month, a spokesman for China's banking regulator said the government addresses problems at risky firms with "market-oriented" solutions.

Some analysts have warned that rescuing troubled companies will only delay China's reckoning with its record corporate debt pile, making it more painful when a crisis inevitably strikes.

Mr Amin of UBS said: "Longer term, the company will need to show itself as stable and well capitalised for investors to regain confidence and consider investing in new issues."

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A version of this article appeared in the print edition of The Straits Times on August 20, 2021, with the headline China Huarong gets state-led bailout after $21.7b loss. Subscribe