‘Courageous’ China May Impose Losses On Huarong Bondholders: NYT

When last I checked on the Huarong debacle, reports indicated the PBoC was set to take on some 100 billion yuan of assets from the state-linked bad debt manager, as officials worked to defuse the bomb at the heart of China’s latest credit scare.

Other ideas included transferring the Finance Ministry’s stake in Huarong to Huijin, which operates within the sovereign wealth fund and is overseen directly by the State Council.

Market participants were obsessed with the Huarong saga for about two weeks, until US inflation shoved the story below the fold.

Read more:

PBoC To Hold Nose, Eat Billions Of Huarong’s Bad Cooking

The Huarong Message

My take was fairly straightforward: China was unlikely to countenance a destabilizing collapse of a systemically important entity. Xi may have executed the company’s (former) chairman, but he’s not likely to allow Huarong to die.

The question was never as much about “contagion” as it was about signaling (How strong of a message does Beijing want to send about SOEs and moral hazard?) and the implications for offshore bondholders.

Fast forward a few weeks and The New York Times suggested that both foreign and domestic investors may indeed suffer losses. “The Chinese government, which has stayed quiet about a rescue, is in the early stages of planning a reorganization that will require foreign and Chinese bondholders alike to accept significant losses on their investments,” an article published Tuesday said, citing a pair of sources familiar with the government’s plans.

Later, Caixin said China Huarong held a Tuesday meeting aimed at allaying creditors’ fears. Huarong has lined up funding to pay foreign debt maturing over the near term. An unidentified “industry insider” said Huarong isn’t necessarily willing to default. Bond market volatility, the person said, is attributable to “asymmetrical information.”

Effectively, the concept of “too big to fail” is being tested in China, alongside the government’s history of backstopping state-linked enterprises.

If Huarong defaults, investors will need to reassess their approach to SOE obligations. If, on the other hand, Beijing rescues Huarong, it’ll just underscore the notion that while taking too much risk might get your chairman killed (literally), you can still count on a backstop if your ties to the government run deep and you’re large enough to cause problems if you collapse.

According to Bloomberg, Huarong has arrangements with state banks to help it make good on debt through “at least the end of August,” when it will finish its accounting statements for 2020.

Last week, the company repaid a $300 million bond due Thursday. A spokesman told Bloomberg the company’s liquidity is “fine.”

Zhangkai Huang, an associate professor at Tsinghua University in Beijing, summed up the market’s approach in remarks to the Times Tuesday. Investors, he said, “are saying, ‘I bet you don’t have the courage to let this default happen because there will be a crisis.’”

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