China has promised to teach a lesson to its most heavily indebted companies. Just not yet.
Huarong Asset Management, the financial conglomerate that was once a figurehead for China’s corporate excesses, said Wednesday night that after months of silence about its future, it would receive financial backing from a group of state-backed companies. The company also said it made a loss of $ 16 billion in 2020.
Citic Group and China Cinda Asset Management were among the five state-owned companies that will make a strategic investment, Huarong said, without giving any further details on how much money would be invested or when the deal would be completed.
Huarong also said it had no plans to restructure its debt, but left unanswered the question of whether foreign and Chinese bondholders would face significant losses on their investments.
Investors took the news as strong evidence that the Chinese government was not yet ready to see the failure of a company so closely tied to its financial system. Investors waited months for news about Huarong and its financial future after the company postponed its annual results in March and suspended trading of its shares in April.
“That’s very positive,” said Michel Loewy, CEO of SC Lowy, an investment firm that has a small position in Huarong’s US dollar bonds. “It is certainly a partial rescue, because I do not believe that completely independent investors would subscribe to a capital increase without assurances or a tip on the shoulder,” said Löwy of the group of state-backed companies mentioned in Huarong’s statement.
Beijing looked the other way for years as companies like Huarong went into heavy debt to expand. The companies grew into giant conglomerates, largely based on cheap state bank loans and money from foreign and domestic investors who believed they could rely on the Chinese government when the going gets tough.
In recent years, however, officials have signaled their willingness to let some of these companies fail as they attempt to contain the skyrocketing debt that threatens China’s economy.
Even when Beijing cracked down on risky bulk lending, Huarong tested the limits of China’s reform commitment. Huarong, known as the “Bad Bank,” was founded in the late 1990s to borrow the ugliest loans from state-owned banks before they turned to global markets to raise money when China opened up. It later expanded into a sprawling empire by lending to high-risk companies and taking advantage of its access to cheap loans from state banks.
Over the years, Huarong became more and more intertwined with China’s financial system, leading some experts to label it “too big to fail” and putting regulators in a difficult position. Under her former chairman, Lai Xiaomin, she engaged in suspicious deals that regulators said led to corruption so widespread that it may be impossible to gauge the full extent of the losses.
Mr. Lai confessed to using his position to accept $ 277 million in bribes and was sentenced to death and executed for corruption and abuse of power in January.
In his statement on Wednesday evening, Huarong blamed the “aggressive operations and disorderly expansion” of the company under Mr. Lai for the loss of $ 16 billion.
A new injection of cash will give Huarong more time to sell pieces of its huge financial empire, analysts noted, although it was unclear whether the investment would be enough to contain the company’s huge losses.