Analysis | China seen bailing out biggest bad-debt manager while teaching investors a ‘hard’ lesson as contagion effects linger
- Government wants to send a message that ‘even state-controlled institutions such as Huarong do not enjoy blanket government guarantees’
- Other financial institutions are so closely tied to the bad-asset manager that letting it fail would pose considerable risks to the domestic and international financial systems
Chinese economic policymakers are caught between a rock and a hard place as they try to piece together a rescue plan for embattled bad-asset manager China Huarong Asset Management.
On the one hand, they want to adhere to the market-based principle that investors should bear part of the burden. But on the other, policymakers are trying to avoid saddling those investors with a cost that would hurt future investments in China.
Because of Huarong’s many connections to other financial institutions, analysts agree that the situation needs to be resolved, and soon, to avoid significant contagion effects on the domestic and international financial systems. The question is what form that resolution will take, and how much government support will factor in the plan.
Given Huarong’s aggressive asset expansion through problematic merger and acquisition transactions overseas, it no longer fixes problems but has become the problem itself, said Larry Hu, chief China economist at Macquarie Group, noting that Huarong’s total assets surged six-fold in the five years to 2017.
But Huarong does not represent a “Minsky moment” – the onset of a market collapse brought on by reckless speculative activity – and the overall risk to China’s financial system remains low because the market still holds a strong belief in Beijing’s seemingly unlimited capacity to step in as the lender of last resort, Hu said.