HONG KONG (Reuters Breakingviews) - Beijing’s ownership is no longer reliable investor insurance. China Huarong Asset Management said on Sunday that its first-half earnings would fall sharply, the latest stumble in an acute crisis triggered by its chairman’s fall from grace. The government, its top stakeholder, seems content to watch the stock collapse. State backing, it seems, now comes with even more fine print.
It is not unusual for privately held Chinese companies to convulse when their founders run into trouble: witness the recent implosions of Anbang Insurance and CEFC China Energy. A corporate culture that treats bosses like gods can leave middle managers paralysed when the main man is abruptly absent. At the same time uncertainty about the ultimate reach of graft investigations makes lenders wary, pushing up borrowing costs.
But Huarong is not a private venture. One of China’s four “bad banks”, it is more accurately described as a distressed debt investor, set up by Beijing in the wake of the 1997 Asian financial crisis to absorb a glut of non-performing loans from commercial banks. As such it is very much a policy creature: the Ministry of Finance owns around half of its main entity. And yet Chairman Lai Xiaomin’s exit still resulted in a cash crunch, forcing the company to sell stakes, recall loans and cut salaries; shares in that Hong Kong-listed unit are down around 50 percent in the year to date.
There are lessons for investors. First, Huarong was already in trouble with regulators, having strayed into shadow banking and speculative investments. Distressed assets were only 27 percent of its total at the end of 2017, according to Morgan Stanley research. Its total liabilities, at 1.7 trillion yuan, were 13 times its shareholder equity.
Secondly, Lai’s talent for putting money into companies that ended up in hot water probably cost it too. According to the South China Morning Post, Huarong invested not only in CEFC and HNA Group, but also in Hanergy Thin Film Power and Dandong Port.
Even so, why the company came under so much stress so quickly is still difficult to explain. That is a wake-up call for those who thought central government control provided some sort of insulation. As Beijing blurs lines between state and private enterprise, more caveats appear to be creeping into perceived guarantees. The devil will be in the details.
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