China considers new holding company for Huarong and three other bad-debt managers

Beijing

CHINA'S finance ministry is considering a proposal to transfer its shares in China Huarong Asset Management and three other bad-debt managers to a new holding company modelled after the one that owns the government's stakes in state-run banks, according to a person familiar with the matter.

Policymakers are re-examining the proposal, which was first tabled three years ago, as part of discussions on how to deal with the financial risks posed by Huarong, said the person, who asked not to be identified discussing private information.

Some officials view the creation of a holding company as a step towards separating the government's roles as a regulator and shareholder, streamlining oversight and instilling a more professional management culture at Huarong and its peers, the person said.

Authorities are also discussing whether to bring in more external investors, effectively reducing the finance ministry's controlling stakes, the person said.

Regulators are still awaiting guidance from senior Chinese leaders on the proposals and on how to resolve Huarong's debt challenges, the person said.

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It is unclear what impact, if any, the proposed changes would have on Beijing's willingness to extend financial support to Huarong and its peers during times of stress.

Even though the government owns stakes in major Chinese banks indirectly through a company called Central Huijin Investment, the firms are still considered by creditors and other counterparties to enjoy strong official backing.

Fears that Huarong might default have rattled bondholders since the end of March, when the company missed a deadline to report annual results. Any move to inflict losses on Huarong's creditors would mark a significant - and potentially risky - step in President Xi Jinping's campaign to reduce moral hazard in the world's second-largest credit market.

With nearly 1.6 trillion yuan (S$332 billion) of liabilities and a vast web of connections with other financial institutions, Huarong is among China's most systemically important companies outside the nation's state-owned banks.

While Huarong has continued to repay maturing debt on time, the company's longer-dated obligations are trading at stressed levels. Its 4.5 per cent perpetual bond is priced at about 60 US cents on the dollar, data compiled by Bloomberg show. In the onshore market, the company's 3.7 per cent bond due 2022 traded at a record low 69.9 yuan on 31 May.

The company has previously said that its liquidity position is "fine" and that it has seen no change in government support.

Huarong has reached funding agreements with state-owned banks to ensure it can repay debt through at least the end of August, by which time the company aims to have completed its 2020 financial statements, people familiar with the matter said last month.

Offloading units

Huarong has also drafted a proposal that would see it offload unprofitable and non-core businesses while avoiding the need for a debt restructuring, though that plan would require approval from senior policy makers, people familiar said in April.

Chinese authorities have so far been silent about Huarong's fate in public as they work out how to manage its debt issues. China Investment Corp (CIC), the US$1 trillion sovereign wealth fund and parent of Central Huijin, has objected to one proposal that would have seen it assume the finance ministry's stake in Huarong.

CIC has argued it does not have the bandwidth or capability to fix Huarong's problems, people familiar with the matter said last month.

The ministry itself, which owns 57 per cent of Huarong on behalf of the Chinese government, has not committed to recapitalising the company, though it has not ruled it out, either, one person said.

Some officials see the Huarong saga as an opportunity to revamp how China oversees all of its bad-debt managers.

The government created Huarong, China Cinda Asset Management Co, China Great Wall Asset Management Co and China Orient Asset Management Co during a banking crisis in the late 1990s, using the firms to carve out 1.4 trillion yuan of non-performing loans from the nation's biggest state-run lenders.

After completing their 10-year mandate as bad-debt managers, the companies expanded into everything from investment banking to trusts and real estate, borrowing billions from banks and bond investors in the process.

Huarong was the most aggressive of the four under former chairman Lai Xiaomin, who was executed in January for crimes including bribery.

Together, the bad-debt managers have nearly US$50 billion in outstanding dollar bonds and need to refinance or repay US$4.9 billion of maturing notes through year-end, according to data compiled by Bloomberg.

China Orient's 2.75 per cent bond due 2030 dropped to 92 US cents on the dollar on Monday from 97 cents at the end of March, while China Cinda's 3 per cent note due 2031 declined to 94 US cents from 99 cents. BLOOMBERG