Ling Huawei: Huarong Is Nowhere Near Defaulting on Offshore Bonds
Last week, a report by foreign media on China Huarong Asset Management Co. Ltd. caused further declines in its bonds. This has likely exposed some overseas investors’ shallow understanding of a situation in China that financial reform is complex, and that such reform and a proper liquidity of Huarong’s offshore debts can co-exist for a long time to come. Meanwhile, some investors with certain knowledge or understanding of Huarong’s restructuring issues have “spotted” trading opportunities.
One of China’s “Big Four” state-owned asset management companies (AMCs), Huarong’s restructuring follows certain development logic and steps, and is not a result of strategizing by some “mastermind.” The “multi-player game” between Huarong and different regulators is still changing and progressing. For now, here’s what we know: Huarong needs to plug the financial hole caused by the corruption scandal involving former company Chairman Lai Xiaomin, and properly respond to the rigid requirements for the release of the annual report within six months of the postponement. In fact, the institutional shortcomings of the AMCs have been recognized by the authorities, but there is no clear solution or priority on how to address them.
With regard to Huarong’s asset quality and liquidity, elaborate analyses have been done by a number of institutions. Although it is impossible to determine the exact state of Huarong’s asset quality, overall, it can be said that the income from its domestic nonperforming asset (NPA) disposal business is reasonable; its branches and subsidiaries are of varying quality; and more emphasis has been placed on this business’ cash recovery level. However, the Covid-19 pandemic and the corruption scandal have impacted the company’s operations and some problems have yet to be fully exposed. Despite its problematic overseas assets and investments, Huarong aims to guarantee the liquidity of offshore debts from the perspective of the whole company — it generally makes liquidity arrangements three months ahead of the maturity of overseas debt. Overall, Huarong is nowhere near defaulting on its offshore bonds worth more than $20 billion, and neither the major shareholder nor the regulators will allow that to happen.
Liquidity management — the fundamental task of financial institutions — requires a professional team to respond effectively over the long term, thus preventing something wrong from happening. Six months since the position became vacant, regulators have planned to appoint Liang Qiang as Huarong president. As a former vice president of China Cinda Asset Management Co. Ltd., another Big Four AMC, he has good professional reputation and is full of energy, so this seems to be a good arrangement.
Currently, there are few opportunities for Huarong to undergo bankruptcy or significant overhauls. First, it is a state-owned financial institution with the Ministry of Finance as its biggest shareholder, so the odds of bankruptcy are close to zero. Second, due to the negative impact of the Lai case, relevant regulators hold diverging views about the company — it is difficult for Huarong to get support of all parties to conduct significant reorganization. Third, the losses of some of Huarong’s businesses were not due to its implementation of government policies, meaning that the company has to fill the hole by itself and then achieve healthier development over time. For example, regulators have required Huarong to dispose of non-core assets as soon as possible. This requirement has recently become a key priority for the asset manager.
In view of the lessons learned from Huarong, the Big Four AMCs, active in the capital markets of the Chinese mainland and Hong Kong, should first and foremost set an example of compliance in terms of information disclosure, high accounting standards and respect for capital market rules. Lai disregarded the rules and the law. All of the AMCs should never repeat the same mistake again. As a leader in the NPA disposal business, Huarong and other AMCs should consider how to untangle relevant institutional issues and how to dispose of NPAs most effectively. In addition to the conventional method of relying on state credit, the AMCs should begin to build their own strength in the disposal of NPAs, and establish a scientific evaluation system with hard constraints for this business.
In addition, all parties should face up to the issues of regulatory misalignment, implement professional personnel recruitment processes and prioritize the healthy development of the AMCs above all.
Ling Huawei is managing editor of Caixin Media and Caixin Weekly.
Contact editor Lin Jinbing (email@example.com)
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