Ling Huawei: Huarong is far from defaulting on offshore bonds

By on May 22, 2021 0

Last week, a foreign media report on China Huarong Asset Management Co. Ltd. caused further declines in its links. This likely revealed the superficial understanding of some foreign investors of a situation in China that financial reform is complex, and that such reform and appropriate liquidity Huarong offshore debt can coexist for a long time. Meanwhile, some investors with some knowledge or understanding of Huarong’s restructuring issues have “spotted” business opportunities.

The restructuring of Huarong, one of the “big four” asset management companies (AMCs) owned by the Chinese state, follows certain logics and stages of development, and is not the result of a strategy developed by a brain”. The “multiplayer game” between Huarong and different regulators is always changing and progressing. For now, here’s what we know: Huarong must close the financial hole caused by the corruption scandal involving the former chairman of the company Lai Xiaomin, and properly meet the stringent annual report publication requirements within six months of postponement. In fact, the institutional gaps AMCs have been recognized by the authorities, but there is no clear solution or priority on how to deal with them.

Regarding the asset quality and liquidity of Huarong, detailed analyzes have been carried out by a number of institutions. While it is impossible to determine the exact state of Huarong’s asset quality, overall it can be said that the revenues from its domestic non-performing asset disposal (NPA) business are reasonable; its branches and subsidiaries are of varying quality; and more emphasis has been placed on the level of cash recovery of this business. However, the Covid-19 pandemic and corruption scandal have impacted the company’s operations and some issues have yet to be fully exposed. Despite its problematic overseas assets and investments, Huarong aims to ensure the liquidity of offshore debt from a company-wide perspective – it typically enters into liquidity deals three months before debt matures. abroad. Overall, Huarong is far from defaulting on its offshore bonds worth more than $ 20 billion, and neither the major shareholder nor the regulators will allow that to happen.

Managing liquidity – the fundamental task of financial institutions – requires a team of professionals to react effectively over the long term, thus preventing anything from happening. Six months after the post became vacant, regulators planned to appoint Liang qiang as chairman of Huarong. As the former vice president of China Cinda Asset Management Co. Ltd., another Big Four AMC, he has a good professional reputation and is full of energy, so it seems like a good arrangement.

At present, Huarong has few opportunities to go bankrupt or undergo major revisions. First, it is a public financial institution whose major shareholder is the Ministry of Finance, so the risks of bankruptcy are close to zero. Second, due to the negative impact of the Lai case, the concerned regulators have divergent views on the company – it is difficult for Huarong to gain the support of all parties to proceed with a meaningful reorganization. Third, the losses of some of Huarong’s enterprises were not due to the implementation of government policies, which means that the enterprise must fill the void on its own and achieve healthier development over time. For example, regulators demanded that Huarong get rid of non-core assets as soon as possible. This requirement has recently become a key priority for the asset manager.

Based on the lessons learned from Huarong, the Big Four AMCs, active in the capital markets of mainland China and Hong Kong, should above all set an example of compliance in terms of information disclosure, high accounting standards and respect for the capital market. rules. Lai ignored the rules and the law. All AMCs should never repeat the same mistake again. As a leader in the NPA elimination industry, Huarong and other AMCs should think about how to unravel the relevant institutional issues and get rid of NPAs in the most efficient way. In addition to the conventional method of relying on state credit, AMCs should start building their own strength in the disposal of NPAs, and put in place a scientific assessment system with strong constraints for this activity. .

In addition, all parties need to address regulatory misalignment issues, implement professional staff recruitment processes, and prioritize the healthy development of AMCs.

Ling Huawei is editor-in-chief of Caixin Media and Caixin Weekly.

Contact publisher Lin Jinbing ([email protected])

Learn more about the case of Huarong and Lai Xiaomin:

Exclusive: Huarong secures new president amid pressure on bonds

Five things to know about Huarong’s debt problems

Disgraced financial bigshot accused of taking more bribes than anyone in China

Exclusive: Fallen Bad-Asset Manager Boss Had Tons Of Money – Literally

In detail: a bad deal in a “ bad bank

Register to read this article for free.

Register now