Breaking News
Investing Pro 0
New Year’s SALE: Up to 40% OFF InvestingPro+ CLAIM OFFER

China Considers Supporting Huarong With Central Bank Funds

Currencies Apr 21, 2021 04:36AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

(Bloomberg) -- China is considering a plan that would see the central bank assume more than 100 billion yuan ($15 billion) of assets from China Huarong Asset Management Co., helping the state-owned company clean up its balance sheet and refocus on its core business of managing distressed debt, people familiar with the matter said.

Under a proposal that’s still being finalized and could change, a unit of the People’s Bank of China would assume assets from some of Huarong’s unprofitable operations, the people said, asking not to identified as the discussions are private. Further details on how the arrangement would work couldn’t immediately be learned.

Separately, China Huarong International Holdings Ltd., the offshore unit that issues or guarantees most of Huarong’s dollar bonds, is in the process of transferring distressed assets worth tens of billions of yuan into a separate offshore entity called China Huarong Overseas Investment Holding Co., one of the people said. The move is aimed at improving the financial health of China Huarong International, the group’s main link to overseas funding, the person said.

Bloomberg has previously reported that Huarong proposed an overhaul plan to Chinese regulators that would involve offloading its money-losing, non-core businesses.

If the PBOC proposal comes to fruition, it would mark a significant show of government support for a company that has faced intense investor scrutiny after missing a deadline to report earnings at the end of March. Speculation about a looming debt restructuring sent Huarong’s dollar bonds to record lows last week, stoking fears of market contagion and prompting some investors to reconsider assumptions about implicit government guarantees that have underpinned China’s credit market for decades. Huarong’s bonds have swung wildly in recent days amid conflicting signals about the company’s fate.

While the China Banking and Insurance Regulatory Commission said last week that Huarong was operating normally and had ample liquidity, authorities have remained quiet about whether the government will offer any financial support. It’s unclear whether Chinese regulators have given Huarong any specific guidance related to its offshore bonds.

The PBOC said it couldn’t immediately comment when contacted by Bloomberg on Wednesday. The CBIRC and Huarong didn’t immediately respond to requests for comment.

“The news suggests that the central government is examining options to provide bail-out solutions to Huarong,” said Dan Wang, an analyst at Bloomberg Intelligence in Hong Kong. “The potential involvement of the PBOC, which is experienced in handling distressed financial institutions, also gives the market more hope that the Huarong saga will be dealt with in an orderly way that is less likely to incur losses for offshore bondholders.”

The company’s 4.5% perpetual bond gained 6.4 cents on the dollar to 79.8 cents on Wednesday, while its 3.75% dollar bond due in 2022 climbed 5 cents to 87.7 cents.

With nearly 1.6 trillion yuan 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. It’s also majority-owned by China’s finance ministry, making it a closely watched barometer of the government’s willingness to backstop debt of troubled state-owned enterprises.

Policy makers have been trying to dial back support for unprofitable SOEs to reduce moral hazard in recent years, but they’ve yet to allow a default by a company controlled by the central government. While Chinese SOEs reneged on a record 79.5 billion yuan of local bonds in 2020, most of the defaulters were linked to regional governments and none were considered as systemically important as Huarong.

Worries about the company’s fate have been most acute among offshore bondholders, in part because most of Huarong’s dollar debt contains a form of credit protection called a keepwell agreement that has yet to be fully tested in court. It’s unclear whether Huarong would be compelled to make good on more than $20 billion in dollar bonds if its offshore units -- especially China Huarong International -- were unable to repay.

Huarong and China’s three other main bad-debt managers have nearly $50 billion in outstanding dollar bonds, or about 8% of China’s overseas investment-grade credit market, data compiled by Bloomberg show. Huarong is the third largest Chinese financial issuer in international markets, according to S&P Global (NYSE:SPGI) Ratings.

The plan being discussed for Huarong has some similarities with the one enacted for troubled Chinese lender Bank of Jinzhou Co. in 2020. Two state-run entities, including one backed by the PBOC, injected 12.1 billion yuan of capital into the bank and assumed 150 billion of its distressed assets. The support package was widely viewed as an attempt to minimize ripple effects on the financial system, after authorities jolted markets in 2019 by seizing control of Baoshang Bank Co. and forcing some corporate creditors to take haircuts.

Among the other Huarong measures under consideration by regulators is the transfer of the Chinese government’s stake from the finance ministry to a unit of the nation’s sovereign wealth fund that has more experience resolving debt risks, a person familiar with the matter said in mid-April. Regulators have held several meetings to discuss Huarong’s fate, people familiar have said.

The PBOC plan is the latest development in a saga that has enthralled China watchers since 2018, when Huarong’s then-chairman Lai Xiaomin was accused of bribery in one of the country’s biggest-ever financial scandals. Under Lai, who was executed earlier this year, Huarong moved far beyond its original mandate of helping banks dispose of bad debt. The company raised billions of dollars from offshore bondholders and expanded into everything from trust companies to securities trading and illiquid investments.

Despite Huarong’s history of mismanagement, some market observers have said the costs of allowing the company to suffer a major default probably outweigh the benefits.

“We see little for the government to gain in letting such a major crisis happen in an effort to eliminate moral hazard in SOEs,” Citigroup Inc (NYSE:C). analysts including Eric Ollom wrote in a recent research report. “A financial crisis would likely result in a return to substantial monetary stimulus to counter any financial instability. The more likely policy outcome seems to be to remind investors of these risks but keep the fallout well contained.”

(Adds analyst quote and bond reaction in eighth and 9th paragraphs.)

©2021 Bloomberg L.P.

China Considers Supporting Huarong With Central Bank Funds

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your profile, will be public on and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email