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Inside the Race to Avert Disaster at Chinaâs Biggest âBad Bankâ
(Bloomberg) — It was past 9 p.m. on Financial Street in Beijing by the time the figure inside Huarong Tower there picked up an inkbrush and, with practiced strokes, began to set characters to paper.Another trying workday was ending for Wang Zhanfeng, corporate chairman, Chinese Communist Party functionaryâand, less happily, replacement for a man who very recently had been executed.On this April night, Wang was spotted unwinding 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 the person who writes them.Its mastery requires patience, resolve, skill, calmâand Wang, 54, needs all that and more. Because here on Financial Street, a brisk walk from the hulking headquarters of the Peopleâs Bank of China, a dark drama is playing out behind the mirrored façade of Huarong Tower. How it unfolds will test Chinaâs vast, debt-ridden financial system, the technocrats working to fix it, and the foreign banks and investors caught in the middle.Welcome to the headquarters of China Huarong Asset Management Co., the troubled state-owned âbad bankâ that has set teeth on edge around the financial world.For months now Wang and others have been trying to clean up the mess here at Huarong, an institution that sitsâquite literallyâat the center of Chinaâs financial power structure. To the south is the central bank, steward of the worldâs second-largest economy; to the southwest, the Ministry of Finance, Huarongâs principal shareholder; less than 300 meters to the west, the China Banking and Insurance Regulatory Commission, entrusted with safeguarding the financial system and, of late, ensuring Huarong has a funding backstop from state-owned banks until at least August.The patch though doesnât settle the question of how Huarong makes good on some $41 billion borrowed on the bond markets, most incurred under Wangâs predecessor before he was ensnared in a sweeping crackdown on corruption. That long-time executive, Lai Xiaomin, was put to death in Januaryâhis formal presence expunged from Huarong right down to the signature on its stock certificates.The bigger issue is what all this might portend for the nationâs financial system and efforts by Chinaâs leader, Xi Jinping, to centralize control, rein in years of risky borrowing and set the nationâs financial house in order.âTheyâre damned if they do and damned if they donât,â said Michael Pettis, a Beijing-based professor of finance at Peking University and author of Avoiding the Fall: Chinaâs Economic Restructuring. Bailing out Huarong would reinforce the behavior of investors who ignore risk, he said, while a default endangers financial stability if a âchaoticâ repricing of the bond market ensues.Just what is going on inside Huarong Tower? Given the stakes, few are willing to discuss that question publicly. But interviews with people who work there, as well as at various Chinese regulators, provide a glimpse into the eye of this storm.Huarong, simply put, has been in full crisis mode ever since it delayed its 2020 earnings results, eroding investor confidence. Executives have come to expect to be summoned by government authorities at a momentâs notice whenever market sentiment sours and the price of Huarong debt sinks anew. Wang and his team must provide weekly written updates on Huarongâs operations and liquidity. They have turned to state-owned banks, pleading for support, and reached out to bond traders to try to calm nerves, with little lasting success.In public statements, Huarong has insisted repeatedly that its position is ultimately sound and that it will honor its obligations. Banking regulators have had to sign off on the wording of those statementsâanother sign of how serious the situation is considered and, ultimately, whoâs in charge.Then there are regular audiences with the finance ministry and the other powerful financial bureaucracies nearby. Among items usually on the agenda: possible plans to hive off various Huarong businesses.Huarong executives are often kept waiting and, people familiar with the meetings say, tend to gain only limited access to top officials at the CBIRC, the banking overseer.The countryâs apex financial watchdogâchaired by Liu He, Xiâs right-hand man in overseeing the economy and financial systemâhas asked for briefings on the Huarong situation and coordinated meetings between regulators, according to regulatory officials. But it has yet to communicate to them a long-term solution, including whether to impose losses on bondholders, the officials said.Representatives at the Peopleâs Bank of China, the CBIRC, Huarong and the Ministry of Finance didnât respond to requests for comment.Focus on BasicsA mid-level party functionary with a PhD in finance from Chinaâs reputed Southwestern University of Finance and Economics, Wang arrived at Huarong Tower in early 2018, just as the corruption scandal was consuming the giant asset management company. He is regarded inside Huarong as low-key and down-to-earth, particularly in comparison to the companyâs previous leader, Lai, a man once known as the God of Wealth.Hundreds of Huarong staff, from Beijing division chiefs to branch employees in faraway outposts, listened in on April 16 as Wang reviewed the quarterly numbers. He stressed that the companyâs fundamentals had improved since he took over, a view shared by some analysts though insufficient to pacify investors. But he had little to say about what is on so many minds: plans to restructure and shore up the giant company, which heâd pledged to clean up within three years of taking over.His main message to the troops: focus on the basics, like collecting on iffy assets and improving risk management. The employees were silent. No one asked a question.One employee characterized the mood in his area as business as usual. Another said co-workers at a Huarong subsidiary were worried the company might not be able to pay their salaries. Thereâs a widening gulf between the old guard and new, said a third staffer. Those who outlasted Lai and have seen their compensation cut year after year have little confidence in the turnaround, while new joiners are more hopeful about the opportunities the change of direction offers.Others joke that Huarong Tower must suffer from bad feng shui: after Lai was 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 begun to emerge among senior management and mid-level regulators: like other key state-owned enterprises, Huarong still appears to be considered too big to fail. Many have come away with the impressionâand it is that, an impressionâthat for now, at least, the Chinese government will stand behind Huarong.At the very least, these people say, no serious financial tumult, such as a default by Huarong, is likely to be permitted while the Chinese Communist Party is planning a nationwide spectacle to celebrate the 100th anniversary of its founding on July 1. Those festivities will give Xiâwho has been positioning to stay in power indefinitelyâan opportunity to cement his place among Chinaâs most powerful leaders including Mao Zedong and Deng Xiaoping.What will come after that patriotic outpouring on July 1 is uncertain, even to many inside Huarong Tower. Liu He, Chinaâs vice premier and chair of the powerful Financial Stability and Development Committee, appears in no hurry to force a difficult solution. Silence from Beijing has started to rattle local debt investors, who until about a week ago had seemed unmoved by the sell-off in Huarongâs offshore bonds.Competing InterestsHuarongâs role in absorbing and disposing of lendersâ soured debt is worth preserving to support the banking sector cleanup, but requires government intervention, according to Dinny McMahon, an economic analyst for Beijing-based consultancy Trivium China and author of Chinaâs Great Wall of Debt.âWe anticipate that foreign bondholders will be required to take a haircut, but it will be relatively small,â he said. âIt will be designed to signal that investors should not assume government backing translates into carte blanche support.âFor now, in the absence of direct orders from the top, Huarong has been caught in the middle of the competing interests among various state-owned enterprises and government bureaucracies.China Investment Corp., the $1 trillion sovereign fund, for instance, has turned down the idea of taking a controlling stake from the finance ministry. CIC officials have argued they donât have the bandwidth or capability to fix Huarongâs problems, according to people familiar with the matter.The Peopleâs Bank of China, meantime, is still trying to decide whether to proceed with a proposal that would see it assume more than 100 billion yuan ($15.5 billion) of bad assets from Huarong, those people said.And the Ministry of Finance, which owns 57% of Huarong on behalf of the Chinese government, hasnât committed to recapitalizing the company, though it hasnât ruled it out, either, one person said.CIC didnât respond to requests for comment.The banking regulator has bought Huarong some time, brokering an agreement with state-owned lenders including Industrial & Commercial Bank of China Ltd. that would cover any funding needed to repay the equivalent of $2.5 billion coming due by the end of August. By then, the company aims to have completed its 2020 financial statements after spooking investors by missing deadlines in March and April.âHow China deals with Huarong will have wide ramifications on global investorsâ perception of and confidence in Chinese SOEs,â said Wu Qiong, a Hong Kong-based executive director at BOC International Holdings. âShould any defaults trigger a reassessment of the level of government support assumed in rating SOE credits, it would have deep repercussions for the offshore market.âThe announcement of a new addition to Wangâs team underscores the stakes and, to some insiders, provides a measure of hope. Liang Qiang is a standing member of the All-China Financial Youth Federation, widely seen as a pipeline to groom future leaders for financial SOEs. Liang, who arrived at Huarong last week and will soon take on the role of president, has worked for the three other big state asset managers that were established, like Huarong, to help clean up bad debts at the nationâs banks. Some speculate this points to a wider plan: that Huarong might be used as a blueprint for how authorities approach these other sprawling, debt-ridden institutions.Meantime, inside Huarong Tower, a key item remains fixed in the busy schedules of top executives and rank-and-file employees alike. It is a monthly meeting, the topic of which is considered vital to Huarongâs rebirth: studying the doctrines of the Chinese Communist Party and speeches of President Xi Jinping. More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.