Huarong Volatility Intensifies as Beijing Keeps Traders Guessing

(Bloomberg) -- Another week of silence from Beijing on the fate of China Huarong Asset Management Co. is stoking renewed volatility in the company’s bonds, as traders juggle competing narratives about the prospect of a debt restructuring.

Price swings have intensified in recent days amid a slew of media reports on whether China’s government will allow Huarong to default, a move that would shatter the decades-long assumption that Beijing always stands behind the debt of companies owned by the central government. Questions have been swirling about the distressed debt manager’s financial health since early April, when it missed a deadline to report 2020 results.

The latest bout of volatility began on May 12, after Caixin Media’s WeNews reported that authorities had urged Huarong to solve its issues on its own. Bonds slumped anew on Tuesday after the New York Times said China’s government is “strongly committed” to making sure both foreign and domestic bondholders don’t receive full repayment of their principal.

Meanwhile, Huarong has continued to repay its maturing bonds on time and said it had seen no change in government support. The company has reached funding agreements with state-owned banks to ensure it can repay debt through at least the end of August, by which time the company aims to have finalized its 2020 results, people familiar with the matter told Bloomberg this week. Huarong’s plan to overhaul its business is complicated, but it doesn’t mean the company is willing to default, Caixin reported Tuesday, citing an unnamed industry insider close to the company.

Through all of this, Chinese officials who will ultimately decide Huarong’s fate have kept quiet. Beijing has offered few clues about its stance since the bond-market drama began, apart from a brief statement from the financial regulator last month saying Huarong was operating normally and had ample liquidity. A final decision on what to do with the company will likely come from Liu He, President Xi Jinping’s economy czar, or possibly from Xi himself.

Huarong’s 5.5% bond due 2025 dropped about 3.7 cents on the dollar to 67 cents on Wednesday and its 4.5% perpetual note fell 6 cents to 50 cents, Bloomberg-compiled prices show. Prices for Huarong’s thinly traded onshore bond due 2022 swung between 98.1 yuan and 79.8 yuan, adding to last week’s volatility.

A resolution on how to deal with the company’s challenges may come around late July or early August, said Dan Wang, a credit analyst at Bloomberg Intelligence. Huarong has the equivalent of about $2.83 billion in offshore and onshore bonds coming due through August, including a dollar note that matures Thursday, data compiled by Bloomberg show. The company has already wired funds to repay that $300 million bond, according to a person familiar with the matter.

What Bloomberg Intelligence Says

“The NYT story was a surprise to the market as it suggested a significant haircut to both onshore and offshore holders. The Caixin report is one of the first more supportive reports from the magazine since early April and the change of tone suggests government and regulators are still working on a resolution.”

- Dan Wang, analyst

Defaults at state-owned Chinese businesses have increased in recent years as Xi’s government dialed back support for weaker borrowers to reduce moral hazard, though none of the companies that missed payments were as systemically important as Huarong.

The financial giant owes domestic and international bondholders the equivalent of about $41 billion, following an ill-fated expansion under former Chairman Lai Xiaomin, who was executed for crimes including bribery in January. Huarong is majority owned by China’s Ministry of Finance and is deeply intertwined with the nation’s $54 trillion financial industry.

The turbulence in Huarong bonds has so far had a limited impact on Chinese credit markets more broadly, with yields on top-rated three-year onshore corporate notes falling to the lowest levels since July. Some analysts have said a lack of market contagion from Huarong could embolden authorities to limit support for the company.

©2021 Bloomberg L.P.

With assistance from Bloomberg