The China Huarong story is about stress and turmoil at
what is one of China's largest managers of distressed debt.
In one of the country's most high-profile
corruption cases,
the former chairman of state-owned
China Huarong Asset Management has been sentenced to death.
Lai Xiaomin was convicted of receiving more than
$270 million over a decade.
The rare and tough sentence...
That was considered a particularly harsh punishment
for corruption.
In part the swift sentencing was taken to be
the latest sign of the Chinese Communist Party
cracking down on corruption,
particularly within the financial system
and within the political system.
We do have breaking news coming from Huarong,
this troubled asset manager here. Just seeing reports
of a looming restructuring of course playing out on this,
and the bond rout there is deepening.
Investors concerned about the finances of state-owned
bad-debt manager China Huarong,
and its silence isn't helping.
I'm standing outside...
China Huarong's bond prices have been incredibly volatile
over the last two months.
It's of huge concern because this could test
China's debt-ridden financial sectors
and the technocrats that run it
as well as all of the foreign banks
and the investors who have been caught in between the drama.
My name is Rebecca Choong Wilkins.
I'm a reporter and editor for Bloomberg News
China credit team.
China Huarong is one of China's largest
distressed-debt managers.
It's a so-called bad bank.
It has long been considered of systemic importance,
partly because its largest shareholder
is the Ministry of Finance.
It was created in 1999 along with three other asset managers
to try and deal with some of the bad debt
in China's economy.
So those were things like bonds or loans
that companies had defaulted on.
And they're considered essential to the running
of China's $54 trillion financial market.
So-called bad banks help carry that risk
on their own balance sheet and help curb
all of that bad debt and remove it essentially
away from the rest of the financial system.
And that allows China's other financial institutions
and its other banks to continue
with different kinds of banking services
that essentially help China's economy to continue growing.
Lai Xiaomin ran China Huarong from 2012 until 2018.
He was also sometimes known as the God of Wealth,
had a background in some of China's
top financial institutions.
He had posts in the People's Bank of China
as well as China's Banking and Insurance
Regulatory Commission.
Under Lai Xiaomin's leadership at China Huarong,
he expanded from the firm's original mandate
dealing with bad debts into things like
securities trading and trusts.
He also turned to the public debt markets
to try and fund some of that expansion.
So under Lai Xiaomin, we also saw a massive expansion
of the firms' bonds, outstanding bonds.
And those types of debts were sold to both mainland
onshore investors as well as global investors overseas
in the form of dollar bonds as well as yuan-
and Hong Kong dollar-denominated bonds.
Lai Xiaomin was sometimes criticized for just caring about
short-term profits and trying to go way beyond the brief
of what traditionally a bad bank like China Huarong
would be dealing with.
He was actually charged with bribery
and taking illicit payments.
In the course of the trial, it came to light that
Lai Xiaomin had over the years collected a spate
of luxury cars, of luxurious apartments
and expensive watches.
He had an apartment that he had renamed "the supermarket"
that was later found to have cabinets
that were full of cash.
And a lot of this came to light during the trial,
some of which was televised
and became quite a public spectacle.
He was executed earlier this year.
The former board chairman of one of China's
biggest asset-management companies, Lai Xiaomin
was executed on Friday, authorities said.
It was found...
So Wang Zhanfeng was appointed afterwards
to take over the running of China Huarong
and essentially to try and get it back onto a safe
and steady footing.
That included things like shaping up its financial health
and pulling back from some of the riskier areas
that Lai Xiaomin has expanded into under his leadership.
He was seen to be certainly not as flamboyant
as his predecessor,
but also brought in specifically to try and introduce
a more serious and professional management style
at China Huarong too.
Concerns first flared at the company at the end of March
when the firm failed to release its 2020 annual reports.
Fundamentally, what it means is that investors
and we don't have a very clear insight into precisely
how that cleanup has actually gone over the last year.
So investors suddenly started to worry that
there could be some issues with its financial health.
Now that was then exacerbated by several media reports
that there could be a potential financial restructuring
at China Huarong.
Well, obviously this has been a saga now. Last week
in a speculation about a possible debt restructuring
sent its overseas bonds down to record lows.
Got another ratings downgrade for Huarong.
You've got to wonder whether this is a little bit
of a delayed reaction.
Well, as we've seen it has been a rocky April for
Huarong bond investors.
And we have seen those notes continue to hit fresh lows
and in the wake of this New York Times report...
China Huarong's bond prices have been incredibly volatile
over the last two months.
In fact, they've been far and away the most volatile trading
that we've seen in the offshore bond market.
And they've actually weighed on the broader bond market
as well.
China Huarong is one of the bigger borrowers
among Chinese firms.
At the moment it has about $40 billion worth
of outstanding bonds in the onshore and offshore market.
About $4 billion of that needs to be repaid
or refinanced this year.
When China Huarong first started selling
a lot of offshore debt,
it was considered by investors to be a really safe bet.
It was considered a quasi-sovereign.
It had an investment-grade quality rating
and the debt itself was really popular
among many institutional investors
and many international investors.
Firms like BlackRock, Allianz and Goldman Sachs
were all once buyers of the notes.
Now the offshore investors are in a little bit
of a tricky situation.
One reason why investors have become so worried
and so panicked about China Huarong is the relative silence
since they said they would be delaying their 2020 results.
We've really only seen the company and regulators come out
once or twice with public comments to try and ease concerns.
Regulators, for example, have said that China Huarong
has ample liquidity
and that its operations are running normally.
Similarly, we've seen some comments from the company itself
also trying to reassure investors that its liquidity is good
and that its operations are running normally.
However, there generally has been a kind of
lack of information around precisely what's going to happen
at the company.
What we do know is that senior management has become
much more accustomed to meeting with regulators
and authorities and having last-minute meetings.
And we also know that the company is now providing
a weekly update on how its liquidity conditions are going
and whether or not its operations are running normally.
In the short term, China Huarong is expected
to meet its debt repayments.
And that's partly because Huarong has been said to come
to this agreement where state banks will support meeting
its debt obligations that come due through August.
On the other hand, however, the longer-term concerns
about the fate of China Huarong persist.
Ultimately investors now are waiting to see whether or not
Beijing and authorities step in to provide a kind of
guarantee or a kind of bailout to China Huarong.
I think the assumption generally is that
authorities do not want to see a failure at Huarong,
which roils the broader market.
If we were to see fundamental
and painful restructuring of China Huarong,
or if we were allowed to see any kind of payment failure
at a firm like Huarong, which is considered to be
of systemic importance, which was backed by
central government institutions,
then that really would change the way that investors
look at this market.