Domestic Bonds

Huarong bonds lose half of their value in a key financing market in China

The Chinese repo market shows how the bonds of China Huarong Asset Management Co. are viewed as risky on the mainland, despite being majority owned by the finance ministry.

According to data from China Securities Depository and Clearing Corp.

The decline in effective value illustrates the astonishing loss of confidence in a business critical to China‘s banking system. Given the size of Huarong’s outstanding yuan bonds – worth $ 18.5 billion – and its former quasi-sovereign status, the company’s banknotes were likely widely used as collateral for the deals. pension.

Beijing’s silence on Huarong’s fate is upsetting investors, fearing that the company will struggle to repay debts without inflicting losses on bondholders. Fitch Ratings and Moody’s Investors Service downgraded Huarong in late April, highlighting a lack of clarity on the scope of central government support. Speculation about Huarong’s financial health has swirled since the company delayed its 2020 results.

“Huarong is currently a blind box,” said Yang Hao, analyst at Nanjing Securities Co.

Investors have become addicted to a drip of media reports for an overview in the absence of official statements. Huarong is “far from” in default on its more than $ 20 billion offshore bonds, the editor of Caixin Media written in an opinion piece dated Saturday. The New York Times reported last week that the central government is in the early stages of a plan to overhaul Huarong – a plan that would inflict “significant losses” on both domestic and foreign bondholders.

Huarong repaid its maturing bonds on time and said as recently as May 13 that he had seen no change in government support. The company has the equivalent of about $ 2.5 billion in offshore and onshore bonds due in August, according to data compiled by Bloomberg.

In the promissory repo market in China, the country’s small banks and brokers obtain the necessary financing by pledging back the securities they hold. If the seller defaults, the repo buyer can seize the securities to compensate for the loss. While most bonds traded in China are eligible as collateral regardless of their credit rating, counterparties generally tend to prefer government or corporate bonds issued by state-owned enterprises – like Huarong – to reduce the risk.

Huarong Securities’ 2023 yuan bond has been rated AAA with China Lianhe credit rating. It traded around 85 yuan on Monday, according to data compiled by Bloomberg.

Click here for a QuickTake on the repo market in China

The Shanghai Stock Exchange is emerging as a key repo market, where After more than 23 trillion yuan ($ 3.6 trillion) in instruments changed hands in April. In return, the CSDC acts as a central counterparty to sellers and buyers. Most transactions still occur in the Chinese interbank market, where there is little transparency and the haircuts tend to be larger than in exchange.

Credit risk is an important component of the Chinese money market. In November, a series of defaults by some state-backed companies have prevented major Chinese banks from lending to small businesses, freezing the repo market before the central bank steps in to inject liquidity.

If the fear that Beijing will not back large state-owned companies gets out of hand, the effects could be widespread given the importance of their bonds as collateral in the repo market.

– With the help of Qingqi She and Xize Kang