When China Huarong failed to disclose its financial results in April last year, investors tried to read the political runes about the country’s biggest bad debt manager.
The former chairman of the company, Lai Xiaomin, was executed for corruption just weeks earlier. In the absence of any official statement on Huarong’s results, investors began to wonder if widespread expectations of government support had been misplaced this time around.
Huarong, which is majority owned by the Ministry of Finance and a major international lender, has expanded far beyond its original remit during Lai’s tenure. It was suddenly a test case for Beijing’s approach to corporate failure.
After months of uncertainty, a lifeline finally showed up. In August, the company record losses announced of $ 16 billion and in November details of a $ 6.6 billion capital injection from a consortium of state-owned firms led by Citic, the financial conglomerate, were announced. Last month, it throw more assets.
Huarong’s story has since retreated from the spotlight, dwarfed by a property crisis centered around privately owned developer Evergrande. Its perpetual foreign bonds, which fell as low as 54 cents in May, are now trading close to their par value. But while some of the uncertainties have been lifted, the case remains an example of the ongoing opacity in China’s rapidly evolving financial system.
One of the most striking details of Huarong’s trajectory, which resonates in other areas of corporate China, is the expansion of its balance sheet. Originally one of four bad debt managers designed to curb the outflow of the Asian financial crisis in the late 1990s, its total assets rose from Rmb315 billion in 2012 to Rmb1,7tn at the end of 2019. In its long-delayed 2020 annual report, It blame a “disorderly extension” under Lai for his deviation from “his main responsibilities”.
This expansion came in the context of an international shift on the part of corporate China, with now-dead companies like HNA and Anbang driving the country’s foreign direct investment. Huarong has also moved away from merely buying distressed assets. In one case, it funded a foreign bond issued by Country Garden, China’s largest real estate developer. Huarong’s state aid status has reduced its borrowing costs in international markets – it has borrowed about $ 20 billion from it, compared to $ 19 billion by Evergrande, the world’s most debt developer.
But while the case highlights Huarong China’s capacity for dramatic debt-financed growth, it also embodies the lack of transparency about the exact nature of where the returns are headed. Investors seem to be accepting the opacity due to the growth, especially in the widespread absence of bond market returns elsewhere over the past decade.
And although the company’s largest investor was the Ministry of Finance, it and other parts of the government may have known very little about the asset allocation action undertaken by Lai.
Huarong said the reason for the delay in the financial results was that its auditors needed more time and that a “relevant transaction” was being finalized. However, the lack of information surrounding the entire Huarong episode from April has led to speculation about the government’s motives.
The delay in publishing its results, for example, has been cautiously interpreted by some investors as a deliberate signal from Beijing to encourage them to reconsider their assumptions about state support. The delay could also be caused by many other factors, including the hidden politics of solving Huarong’s problems or even the authorities’ own attempts to obtain information.
Although often presented as a single entity, the Chinese government may be more a connection of rival political factions on issues such as Huarong. This makes situations with distressed debt 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 continue to temper market forces – especially in situations where it has a direct involvement.
“I would not say China is moving fast with market-based reforms based on what I have seen, certainly not for the state-owned enterprises,” says Ron Thompson, a restructuring expert at Alvarez & Marsal. “In almost every case [of restructuring] the government has some involvement. ” This means investors will have to keep trying to read the political runes in China.