China Huarong warns of US$4 billion loss for 2022, as volatile capital markets hammer bad-loan manager’s business

Company cites capital-market volatility and slumping property market as reasons for the loss
China’s Ministry of Finance fined the company 100,000 yuan on Friday for poor risk controls and ‘severely distorted’ accounting data

Banking & finance

Elise Makin Beijing

Published: 2:01pm, 20 Mar 2023

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China Huarong Asset Management expects to post a net loss of 27.6 billion yuan (US$4 billion) for 2022, two years after a record loss prompted the Chinese government to bail out the group.

The bad-loan manager said capital-market volatility eroded the fair values of certain equity financial assets, resulting in “significant unrealised losses”. It also said that a slump in the property market forced it to set aside money for losses in the value of its assets.

The profit warning, in a filing with the Hong Kong stock exchange on Sunday, came after Huarong said on Friday it was fined 100,000 yuan by China’s Ministry of Finance, which found the company’s internal risk controls ineffective and its accounting data “severely distorted”. Seven Huarong subsidiaries also received fines of the same amount.

Shares in Huarong fell by 3.5 per cent to HK$0.42 in Hong Kong on Monday.

A visitor walks past a booth from accounting firm Deloitte at the China International Fair for Trade in Services (CIFTIS) in Beijing on September 5, 2020. The Beijing office of Deloitte Touche Tohmatsu has been fined US$30.8 million for failing to adequately audit China Huarong Asset Management, the Ministry of Finance announced on Friday. Photo: AP

Focusing on distressed asset management, the company is one of China’s four large bad-loan managers, along with Cinda, China Great Wall Asset Management and China Orient Asset Management.

China Huarong said it scaled back its business as defaults among property developers ballooned. Ensuing restructuring of their debts prompted investors to book losses, it added.

Losses narrowed by around 10.1 billion yuan in the second half of 2022 compared with the first half, Huarong added.

Hong Kong stocks slip amid Credit Suisse deal worries as Huarong flags losses

The company “will continue to strengthen internal controls and optimise [its] comprehensive risk-management system”, it said on Friday following the Ministry of Finance penalty.

The ministry also fined Deloitte’s China unit 212 million yuan for failures in audit work conducted at Huarong. The accounting firm allegedly ignored compliance checks on important investments, failed to offer auditing suggestions on abnormal transactions, and failed to objectively assess the condition of Huarong’s assets, according to the ministry.

Huarong reported a massive net loss of 102.9 billion yuan in 2020. The company roiled Asian credit markets in 2021 when it failed to release its earnings report for 2020, prompting the government to orchestrate a bailout of US$6.6 billion.

Deloitte China unit fined US$31 million for Huarong auditing failures

The company was then able to turn to profit of 378.5 million yuan in 2021, when it said its acquisition-and-disposal business had faster turnover and realised a year-on-year increase in income.

Huarong also optimised the asset layout of its equity businesses, such as its market-oriented debt-to-equity business, which resulted in concurrent fair value increases along with capital markets and a year-on-year increase in revenue from certain equity investment businesses.

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