Race to avert disaster at China’s biggest ‘bad bank’

(Bloomberg) – It was past 9 p.m. on Financial Street in Beijing by the time the character inside the Huarong Tower picked up an ink brush and, with trained strokes, began to put characters on paper. entrepreneur, Chinese Communist Party official – and, less fortunately, replacement for a man who had been executed very recently.On that April night, Wang was seen relaxing as he often does in his office: practicing the art of Chinese calligraphy, a form that expresses the beauty of classical characters and, it is said, the nature of whoever writes them. Mastering it takes patience, resolve, skill, calm – and Wang, 54, needs all of these and more. Because here on Financial Street, just steps from the imposing headquarters of the People’s Bank of China, a dark drama unfolds behind the mirrored facade of the Huarong Tower. How this plays out will test China’s vast indebted financial system, the technocrats scrambling to fix it, and the banks and foreign investors caught in the middle. Welcome to the headquarters of China Huarong Asset Management Co., the company State in difficulty. bad bank ”which put its teeth on the rails in the financial world. For months, Wang and others have been trying to clean up the mess here in Huarong, an institution that sits – literally – at the center of China’s financial power structure. To the south is the central bank, manager of the world’s second largest economy; in the southwest, the Ministry of Finance, Huarong’s main shareholder; less than 300 meters to the west, the China Banking and Insurance Regulatory Commission, charged with protecting the financial system and, recently, ensuring that Huarong has funding support from state-owned banks until ‘at least in August. the question of how Huarong succeeded on some $ 41 billion borrowed from the bond markets, most of it under Wang’s predecessor before he was trapped in a sweeping crackdown on corruption. Long-time ruler Lai Xiaomin was put to death in January – his formal presence was kicked out of Huarong until his share certificates were signed. The bigger issue is what all this might portend for the country’s financial system and China’s efforts. The leader, Xi Jinping, to centralize control, curb years of risky borrowing and put the country’s financial house in order. “They are damned if they do and damned if they don’t,” said Michael Pettis, a Beijing-based professor. of finance at Peking University and author of Avoiding the Fall: China’s Economic Restructuring. Bailing out Huarong would reinforce the behavior of risk-ignorant investors, he said, while a default endangers financial stability if a “chaotic” bond market revaluation ensues. What is going on inside the Huarong Tower? Given the stakes, few are prepared to debate this issue publicly. But interviews with people who work there, as well as with various Chinese regulators, provide insight into this storm.Huarong, in simple terms, has been in the midst of a crisis since delaying its 2020 results, eroding investor confidence. . Executives expect to be summoned by government officials at any time whenever market sentiment deteriorates and the price of Huarong’s debt drops again. Wang and his team are to provide weekly written updates on Huarong’s operations and liquidity. They turned to state-owned banks, pleading for their support, and reached out to bond traders to try to calm nerves, with little lasting success. In public statements, Huarong repeatedly insisted that his position was ultimately solid and that he would honor his obligations. Banking regulators had to approve the wording of these statements – another sign of how serious the situation is and, ultimately, who is responsible. Then there are regular hearings with the Ministry of Finance and other powerful financial bureaucracies nearby. Among the items usually on the agenda: possible plans to part ways with various companies in Huarong. Executives in Huarong are often held on hold and, according to people familiar with the meetings, tend to have only one limited access to senior officials of the CBIRC, the banking supervisor. The main financial watchdog – chaired by Liu He, Xi’s right-hand man in overseeing the economy and financial system – requested information on Huarong’s situation and coordinated meetings between regulators, officials said. regulations. But he has yet to communicate to them a long-term solution, including whether to impose losses on bondholders, officials said. Representatives of the People’s Bank of China, CBIRC, Huarong and Ministry of Finance did not respond to requests from A mid-level party official with a doctorate in finance from the renowned Southwest China University of Finance and Economics, Wang arrived at the Huarong Tower in in early 2018, as the corruption scandal devoured the giant asset management company. He is seen within Huarong as low-key and down-to-earth, especially compared to the company’s former executive, Lai, a man once known as the God of Wealth. distant outposts, listened on April 16 as Wang reviewed the quarterly figures. He said the fundamentals of the company had improved since his arrival, a view shared by some analysts but insufficient to pacify investors. But he had little to say about what worries so many: plans to restructure and consolidate the giant company, which he pledged to clean up within three years of taking over. , such as collecting on doubtful assets and improving risk management. The employees were silent. No one asked a question. One employee described the atmosphere in his region as “business as usual”. Another said that colleagues at a subsidiary in Huarong feared the company could not pay their salaries. There is a growing rift between the old and the new guard, a third staff member said. Those who survived Lai and saw their pay drop year after year have little confidence in the turnaround, while newcomers are more optimistic about the opportunities offered by the leadership change. arrested, a bank that had a branch in the building had to be bailed out to the tune of $ 14 billion. Dark humor aside, a rough consensus has started to emerge among senior executives and mid-level regulators: Like other key state-owned companies, Huarong still seems to be seen as too big to fail. Many have come back with the impression – and this is an impression – that for now, at least, the Chinese government will support Huarong. Huarong, is likely to be cleared while the Chinese Communist Party plans a national performance to celebrate the 100th anniversary of its founding on July 1. The festivities will give Xi – who has positioned himself to stay in power indefinitely – an opportunity to consolidate his place among China’s most powerful rulers, including Mao Zedong and Deng Xiaoping. What will happen after this patriotic outpouring on July 1 is uncertain, even for many inside the Huarong Tower. Liu He, Chinese vice premier and chairman of the powerful Financial Stability and Development Committee, does not seem in a hurry to impose a difficult solution. Beijing’s silence began to rattle local debt investors, who until about a week ago seemed insensitive to the sale of Huarong’s offshore bonds. cleanup, but requires government intervention, according to Dinny McMahon, an economic analyst for Beijing-based consultancy Trivium China and author of the Great Wall of China’s debt. small, ”he said. “It will be designed to signal that investors should not assume that government support translates into white card support.” For now, in the absence of direct orders from the summit, Huarong has been caught in the midst of competing interests among various state members. Businesses and government bureaucracies. China Investment Corp., the $ 1 trillion sovereign wealth fund, for example, has rejected the idea of ​​taking a controlling stake in the finance ministry. CIC officials have argued that they do not have the bandwidth or ability to resolve Huarong’s problems, people familiar with the matter say. The People’s Bank of China, meanwhile, is still trying to decide whether to sue. or not a proposition that would see her assume. Huarong’s more than 100 billion yuan ($ 15.5 billion) in questionable assets, the people said. And the finance ministry, which owns 57% of Huarong on behalf of the Chinese government, has not made a commitment. to recapitalize the company, although it did not The CIC did not respond to requests for comment. The banking regulator bought Huarong for a while, negotiating a deal with public lenders, including Industrial & Commercial Bank of China Ltd. cover any funding needed to repay the equivalent of $ 2.5 billion when due at the end of August. By then, the company aims to complete its financial statements for 2020 after scaring investors by missing deadlines in March and April. “The way China treats Huarong will have wide ramifications for the perception and confidence of global investors in Chinese state-owned enterprises,” said Wu Qiong, a Hong Kong-based executive director at BOC International Holdings. “If defaults resulted in a reassessment of the level of government support assumed in the credit rating of SOEs, it would have profound repercussions on the offshore market.” The announcement of a new addition to Wang’s team underscores the issues and, for some insiders, provides a measure of hope. Liang Qiang is a permanent member of the All-China Financial Youth Federation, widely regarded as a pipeline for preparing future leaders for financial state-owned enterprises. Liang, who arrived in Huarong last week and will soon assume the role of chairman, has worked for the other three big state asset managers that were created, like Huarong, to help clean up bad debts from banks in the country. country. Some speculate that this suggests a larger plan: that Huarong could be used as a model for how authorities approach these other sprawling, debt-ridden institutions. Meanwhile, inside the Huarong Tower, a key element remains. fixed in the busy schedules of senior executives and rank. -and-classify employees in the same way. It is a monthly meeting whose subject is considered vital for the rebirth of Huarong: the study of the doctrines of the Chinese Communist Party and the speeches of President Xi Jinping. More stories like this are available at bloomberg.com Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP


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