(Bloomberg Opinion) — Investors around the world want a quick resolution to the problems at China Huarong Asset Management Co. but this is going to be a nail-biter. Huarong — majority owned by the state through the Ministry of Finance — has dollar bonds due every month into the summer; and the overseas subsidiary that guarantees these bonds is short on cash. When is China going to bail out its largest state-owned distressed asset manager? How much will investors be able to get back?
The government is considering a plan that would see a unit of the People’s Bank of China assume more than 100 billion yuan ($15 billion) of Huarong’s assets, Bloomberg News reported. That would be a significant show of support. According to the report, the plan being discussed for Huarong has some similarities to the one enacted last year for the troubled Bank of Jinzhou Co.
So, how should we read this? Will China simply pay off Huarong’s $22 billion in dollar bonds to save face on the world stage? It’s not impossible. After all, with the 100th anniversary of the Chinese Communist Party coming in July, “the tolerance for market turmoil and a financial meltdown is extremely low, especially over the next few months,” Goldman Sachs Group Inc. wrote in a recent note to clients.
What’s key is the PBoC’s willingness to dive into the Huarong mess. It did so with its rescue of Bank of Jinzhou. And that episode has made one thing clear: The PBoC is now mindful of market prices and is no longer willing to throw good money after bad.
The big picture of the episode is heartening: Through asset disposals and capital injections, the central bank plowed at least 55 billion yuan ($8.47 billion) into the lender, which held 837 billion yuan in total assets in 2019, according to data compiled by Bloomberg Opinion. Bank of Jinzhou is still in operation today.
But, there is a tough lesson for Huarong. The PBoC did not assume assets at book value — not even close. Last year, Chengfang Huida, a fund managed by the PBoC, paid only 45 billion yuan for Bank of Jinzhou disposal assets that have a book value of about 150 billion yuan. In other words, the PBoC fund bought at a 70% discount. This is “the market price,” noted the central bank in its 2020 financial stability report.
Bank of Jinzhou was not even a worst-case scenario in terms of PBoC restructurings. It was willing to go further when dealing with an insolvent financial institution whose debt pile far exceeded its asset value. That’s what happened with its 2019 takeover of Baoshang Bank Co. Unable to find new strategic investors to recapitalize Baoshang, the PBoC last year allowed the bank’s 6.5 billion yuan onshore tier-2 bonds to be written down in full. “This answers a long-standing question as to whether China will impose losses on bondholders. They will,” says Bloomberg Intelligence.
Re-capitalizing Huarong, which, as of June, held 1.7 trillion yuan in assets but only 168 billion yuan in equity, will require a lot of arm-twisting with other divisions of the government. Bloomberg News reported last week the Ministry of Finance was mulling transferring its stake in Huarong to Central Huijin Investment Ltd — a unit of the sovereign fund China Investment Corp. — that invests in domestic state-owned financial institutions. But even Huijin may balk at investing in distressed companies. It’s done so in the past.
According to Caixin, an influential provider of financial news in China, Huijin said no to Bank of Jinzhou’s re-capitalization plans. In 2019, Huijin did end up injecting 60 billion yuan into Hengfeng Bank Co., another lender in crisis, at twice the amount it had originally agreed. But that extra 30 billion yuan was more of a three-year repurchase agreement with the Shandong provincial government, where Hengfeng Bank was based. In terms of asset size, both banks roughly are half Huarong’s.
Publicly, Huarong might be receiving “very strong government support,” as ratings agencies and sell-side analysts say. But, as the PBoC’s other recent rescues have shown, behind the scenes are wrangling over billion dollar write-downs, reluctant suitors and deep haircuts. As I’ve argued before, if the Huarong drama gets ugly onshore, the overseas subsidiary arm can easily be cut off, leaving foreign bond-holders empty-handed. A bailout does not mean you will be made whole.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.