This report does not constitute a rating action.
HONG KONG (S&P Global Ratings) April 21, 2021--The delayed results of China Huarong Asset Management Co. Ltd. (Huarong) are stoking investor concerns about transparency risks, creating volatility in China's overseas bond market. S&P Global Ratings believes associated events may prompt a reassessment of the robustness of government support for the country's state-owned enterprises (SOEs), asset management companies, and other financial institutions.
We believe, however, that policymakers will stop the situation from evolving into systemic financial instability that could affect our sovereign rating on China (A+/Stable/A-1).
Huarong (BBB+/WatchNeg/A-2) is China's largest state-owned distressed asset management company. With US$22.6 billion of global bonds outstanding, it is the third largest Chinese financial issuer in international markets, making up a tenth of all global bonds issued by Chinese banks and financial firms.
On March 31, 2021, Huarong announced it would delay the release of its results for the fiscal year ended Dec. 31, 2020. The results were due that day. It said that the auditor needed more time and information to audit a transaction. The China Banking and Insurance Regulatory Commission made a statement on April 16, 2021 that Huarong's operations were proceeding as normal. However, Huarong has yet to release details on the progress of the audit and the expected timeframe for its completion.
On April 9, 2021, we placed the ratings on Huarong and its rated subsidiaries on CreditWatch with negative implications, which we expect to resolve in the next three months (see "China Huarong Asset Management, Subsidiaries Placed On CreditWatch Negative Following Delayed Results," published April 9, 2021, on RatingsDirect).
"We believe the results delay may impede the group's access to offshore capital markets, so long as the situation remains unresolved. Huarong may need to rely on internal sources or other funding to meet its offshore liquidity needs over the coming months," said S&P Global Ratings financial institutions credit analyst Harry Hu.
Governance Risks Compound The Effect Of The Results Delay
The unexpected nature of the event and the lack of information have shaken investor confidence in Huarong. This confidence has been eroding since the government investigated its ex-chairman Lai Xiao Min three years ago.
The company's operating performance and asset quality have been weaker than peers', largely due to legacy exposure associated with Mr. Lai. In our view, investors remain concerned about these issues (see "China Huarong Asset Management Co. Ltd. And China Huarong International Holdings Ltd.," published Oct. 27, 2020).
While we have observed stricter risk management, lower risk appetite, and tightening control over Huarong's offshore investment recently, there has been no official disclosure on its progress in reducing problematic legacy assets. We believe these existing issues have made investor confidence in the entity more fragile, contributing to large price swings in its outstanding bonds following the delayed results.
Huarong Raises Questions About State Support For Chinese SOEs
We believe Huarong has a very high likelihood of extraordinary government support, which we expect to flow on a timely basis to its core offshore subsidiary, China Huarong International Holdings Ltd. (CHIH; BBB+/WatchNeg/A-2).
"For those government related entities we see as likely to receive state support in times of stress, we believe such support will also flow through to their key offshore subsidiaries," said S&P Global Ratings corporate credit analyst Charles Chang.
Continued delays in information disclosure and prolonged inability to access capital markets may cause us to reassess the parent-subsidiary link and the indirect flow of government support that we factor into our ratings on CHIH. If the extraordinary government support were not forthcoming, we may need to reassess the support for Huarong's offshore subsidiaries as well as the support for offshore subsidiaries of other Chinese government related entities.
There Is No Immediate Sovereign Rating Risk
We believe Chinese policymakers are watching the situation closely and will act to prevent uncertainties from triggering systemic financial instability, such as raising questions about the government's support for large Chinese institutions.
"The government has said little about the situation so far. However, we believe they are ready to act if the stress on Chinese financial markets show signs of escalating significantly. Policymakers view maintaining stability as a top priority," said S&P Global Ratings sovereign credit analyst KimEng Tan.
With the expectation that domestic financial stability will not be materially affected, we see no immediate risk to the sovereign ratings arising from the Huarong situation. Nevertheless, there is a risk of policy missteps or that market participants may misinterpret events. If volatility escalates, the government may be compelled to take very strong measures to stabilize financial conditions. That could hurt the government's balance sheet, or that of its key financial institutions.
We believe the government is reluctant to reinforce expectations of blanket state support for its SOEs, as doing so could entrench the moral hazard problem historically pronounced in China's financial markets. Balancing the now dual priorities of market discipline and financial stability remains challenging and is a key source of uncertainty for Huarong and China's other government related entities (see "Rating Government-Related Entities: Methodology And Assumptions," March 26, 2015).
- China Huarong Asset Management, Subsidiaries Placed On CreditWatch Negative Following Delayed Results, April 9, 2021
- China Huarong Asset Management Co. Ltd. And China Huarong International Holdings Ltd., Oct. 27, 2020
- Rating Government-Related Entities: Methodology And Assumptions, March 26, 2015
Editing: Jasper Moiseiwitsch
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|Corporate Credit Analyst:||Charles Chang, Hong Kong + 852-2912-3028;|
|Financial Institutions Credit Analyst:||Harry Hu, CFA, Hong Kong + 852 2533 3571;|
|Sovereign Credit Analyst:||KimEng Tan, Singapore + 65 6239 6350;|
|Secondary Contacts:||Manqi Xie, CFA, Hong Kong + 85225328001;|
|Ming Tan, CFA, Singapore + 852 2532 8074;|
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