The Schall Law Firm Reminds Investors of a Class Action Lawsuit Against Champignon Brands Inc. and Encourages Investors with Losses in Excess of $100,000 to Contact the Firm


China’s Very Bad Bank: Inside the Huarong Debt Debacle

(Bloomberg) – It has been 11 weeks since Lai Xiaomin, the man who was once known as the god of wealth, was executed on a cold Friday morning in the Chinese city of Tianjin. However, his shadow still hangs over one of the most dramatic corruption stories ever to emerge from China – a story that is now getting nervous in the financial world. At the center is China Huarong Asset Management Co., the state-owned financial company that Lai ruled until it became embroiled in a full-blown crackdown on corruption by China’s leader Xi Jinping. Questions are burning from Hong Kong to London to New York. Will the Chinese government be behind $ 23.2 billion Lai borrowed in overseas markets – or will international bond investors suffer losses? Are major state-owned companies like Huarong still too big to fail, as global finance has long assumed – or are these companies allowed to stumble like everyone else? The answers will have a huge impact on China and markets across Asia. Should Huarong fail to fully repay his debt, the development would cast doubts on a core set of Chinese investments: the supposed government support for major state-owned or state-owned enterprises. “A failure at a central government company like Huarong is unprecedented,” said Owen Gallimore, head of credit strategy for Australia & New Zealand Banking Group. Should that happen, it would represent a “turning point” for the Chinese and Asian credit markets. Since the Asian financial crisis at the end of the nineties, the topic has not been given such weight. Huarong bonds – one of the most widely held government bonds in the world – recently fell to a record low of around 52 cents against the dollar. That’s not the penny for a dollar normally associated with badly ailing companies in other countries, but it’s practically unknown to a state-owned company. Fears of a short-term outage subsided Thursday after the company allegedly prepared funds for the full $ 600 repayment that Huarong plans to pay on the due date, according to a person familiar with the matter who asked not to be named to discuss private information. That is a drop in the ocean and will not remove investor concerns. In total, Huarong owes its bondholders at home and abroad the equivalent of US $ 42 billion. According to Bloomberg data, around $ 17.1 billion of this will be due by the end of 2022. Bad bank It shouldn’t be like that. Huarong was founded after the collapse of Asia in the 1990s to avert another crisis without causing one. The idea was to stem a growing wave of bad loans threatening Chinese banks. Huarong was to serve as a “bad bank,” a safe haven for the billions in sourcing loans to state-owned companies. Along with three other bad banks, Huarong traded criminal debts for stakes in hundreds of large state-owned companies, helping to reverse chronic money losers like giant China Petroleum & Chemical Corp. After Lai acquired the company in 2012, Huarong reached out for more, moving into investment banking, trusts, real estate, and positioning itself as a major player in China’s $ 54 trillion financial industry. It didn’t take long for global banks to knock on the door. In 2013, Shane Zhang, Co-Head of Investment Banking in the Asia-Pacific region at Morgan Stanley, met with Lai. Zhang said his company is “very optimistic” about Huarong’s future. This is evident from a statement posted on Huarong’s website at the time. Before Huarong went public in Hong Kong in 2015, it sold a $ 2.4 billion stake to a group of investors including Warburg Pincus, Goldman Sachs Group Inc., and Malaysia’s sovereign wealth funds. BlackRock Inc. and Vanguard Group have also acquired many shares, according to Bloomberg. The stock has collapsed 67% since it was listed. Lai had no problem funding his great ambitions. A big reason: Everyone thought Beijing would always stand behind a key company like Huarong. In the offshore market, it was easy to borrow money at rates as low as 2.1%. Even more loans were taken out in the domestic interbank market. Along the way, Lai turned Huarong into a powerful shadow lender, granting loans to companies that were turned down by banks. The truth was darker. Lai, a former senior official in the country’s banking regulator, issued loans with little oversight from his board of directors or risk management committee. A Huarong loan officer said Lai personally decided on most of the offshore corporate loans drawn by her department. Money also went to projects disguised as part of China’s efforts to build railways, ports, and more around the world – the so-called Belt and Road Initiative, according to a state bank executive. Huarong did not immediately respond to questions about his lending practices. Given Lai’s fate, they both discussed the condition of anonymity. Huarong snapped up more than half of the 510 billion yuan in bad debt sold by Chinese banks in 2016, at its peak, Lai’s sprawling empire had nearly 200 units domestically and abroad. He boasted in 2017 that after Huarong hit the Hong Kong Stock Exchange, he would soon be listed in mainland China as well. The IPO never took place. Lai was arrested in 2018 and subsequently confessed to a number of economic crimes on a state TV show. He said that a lot of cash was taken to an apartment in Beijing that he called a “supermarket”. The authorities said they discovered 200 million yuan there. Expensive real estate, luxury watches, art, gold – the list of Lai’s treasures went on. Last January, Lai was found guilty by the Tianjin Secondary Intermediate People’s Court of accepting $ 277 million in bribes between 2008 and 2018 to death three weeks later – a rare use of the death penalty for economic crimes. Some took the execution as a message from China’s Leader Xi Jinping: My crackdown on corruption will continue. At Huarong the floor fell out. Net income fell 95% to 1.4 billion yuan from 2017 to 2019, and then fell 92% in the first half of 2020. Its wealth has shrunk by 165 billion yuan. The company announced on April 1 that it would delay its results for 2020, the auditor needed more time. Influential Caixin magazine openly speculated on Huarong’s fate this week, including the possibility of bankruptcy. The credit prospects have been reviewed by all three top rating companies for a possible downgrade. According to those familiar with the matter, Huarong has proposed a major restructuring. The plan would include relocating its money-losing, non-core businesses. Huarong is still trying to figure out what these companies could be worth. The proposal, which would have to be approved by the government, explains why the company has delayed its results for 2020. Company executives have met with colleagues at state banks for the past two weeks to address their concerns, a Huarong official said. The Chinese Ministry of Finance has raised another option: transferring its stake in Huarong to a unit of the country’s sovereign wealth fund, which could then resolve the various debt problems. The regulators have held several meetings to discuss the plight of the company, according to people familiar with the matter. In an email response to questions from Bloomberg, Huarong said the company has “adequate liquidity” and plans to announce the expected 2020 results release date after consultation with auditors. China’s banking and insurance regulator did not immediately respond to a request for comment on Huarong’s situation. News The company plans to repay a bond due this month that helped its bonds rebound from record lows on Thursday. It’s not just about funding costs, though, said Thu Ha Chow, portfolio manager at Loomis Sayles Investments Asia in Singapore. For Huarong to gain access to the market, it needs “a clear and definitive commitment” from the Chinese Treasury Department on offshore debt or clarity on restructuring. One thing is certain: Huarong is part of a much bigger problem in China. Government corporations have $ 4.1 trillion in debt, and a growing number of them are struggling to keep up with creditors. Overall, state-owned companies rejected a record 79.5 billion yuan in local bonds in 2020, increasing their rate of default on land from just 8.5% last year to 57%, according to Fitch Ratings. The number rose to 72% in the first quarter of 2021. The Huarong shock waves and these wider debt problems have only just begun to make their way through China’s finances. Dismantling all or part of Lai’s old empire would show Beijing is willing to accept short-term pain in order to instill financial discipline in state-run companies. The irony is that Huarong should solve China’s major debt problem, not create a new one. “Failing a state-owned financial institution that has taken on the task of solving problems in China’s financial system is the worst way to deal with risk,” said Feng Jianlin, a Beijing-based chief analyst at FOST research institute. “The authorities need to be aware of the massive risk spillover effects.” (Updates with Loomis Sayles comment in the last section) For more articles like this, visit Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

Comments are closed.