Huarong and state defaults

CHINA ADVISORY - Report 30 Apr 2021 by Andrew Collier

The Huarong near default was important because a) it is the largest of the country’s Asset Management debt workout firms; b) it is 61 percent owned by the Ministry of Finance, making it directly owned by the central government; and c) it is has a significant amount of outstanding bonds, both domestic and foreign. It also poses a systemic risk to the financial system due to the overall “hidden” debt owed by the AMCs to the banks for debt workouts and thus has symbolic value to the stability of the AMCs, and by extension, the banks themselves.

I expect:

1) Protection of the majority of the creditors of Huarong for the reasons cited above, with the possibility of some discounts as a “punishment” to investors and encouragement to analyze credits more carefully; and

2) Rising defaults and near-defaults of AMCs and other financial institutions due to the unstable funding position of the AMCs, the lack of transparency of their business, and the reliance of the financial system on lightly regulated shadow banks.

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