HONG KONG — BlackRock gave it money. So did Goldman Sachs.
Foreign investors had good reason to trust Huarong, the sprawling Chinese financial conglomerate. Even as its executives showed a perilous appetite for risky borrowing and lending, the investors believed they could depend on Beijing to bail out the state-owned company if things ever got too dicey. That’s what China had always done.
Now some of those same foreign investors may need to think twice. Huarong is more than $40 billion in debt to foreign and domestic investors and shows signs of stumbling. The Chinese government, which has stayed quiet about a rescue, is in the early stages of planning a reorganization that will require foreign and Chinese bondholders alike to accept significant losses on their investments, according to two people familiar with the government’s plans.
Beijing has spent decades bailing out Chinese companies that got in over their heads, but in recent years has vowed to turn off the tap. While regulators have promised to make an example out of financial institutions that gorged on loans and waited for the government to foot the bill, Huarong is testing the limits of that resolve.
Unlike the handful of small banks and state-owned companies that have been allowed to fall apart, Huarong is a central part of China’s financial system and, some say, “too big to fail.” Its vulnerable status has left China’s leaders with a difficult choice: let it default and pierce investor faith in the government as a lender of last resort, or bail it out and undermine efforts to tame the ballooning debt threatening the wider economy.
highly unusual punishment that experts said was meant to send a message.
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Mr. Lai confessed to accepting $277 million in bribes, telling state television that he had kept $30 million cash in safes around his apartment in Beijing, which he referred to as his “supermarket.”
Chinese regulators fear the corruption shown by Mr. Lai has become so embedded in Huarong’s business practice that assessing the full extent of its losses and the collateral damage from a possible default is a challenge.
“The scale and amount of money involved in Lai Xiaomin’s case is shocking,” said Li Xinran, a regulator at the Central Commission for Discipline Inspection. “This shows that the current situation of the fight against corruption in the financial sector is still serious and complex. The task of preventing and resolving financial risks is still very difficult.”
said that it would delay publishing its annual results in March. It delayed its annual results a second time last month, raising worries about the state of its financial health and its ability to repay investors.
Any situation where Huarong is unable to repay in full its investors would ripple through some of the world’s biggest and most high profile investment firms. As the international financial market grappled with that scenario, the bonds recently went into a tailspin.
This year alone, Huarong owes $3.4 billion to foreign investors. After it delayed releasing its annual results, the bonds sold for as little as 60 cents for every dollar. In Hong Kong, its stock was suspended.
It is already very late for a big corporate reorganization, said Larry Hu, head of the China economics desk at Macquarie Group. “Huarong has already become too big to fail,” he said. “It is no longer a fix to the problem, but the problem itself.”
The government’s latest plan, which has not yet been reported, is likely to roil China’s corporate market. Last month, the broader market for Chinese companies started to wobble as anxious investors began to consider a possible contagion effect.
Chinese companies owe nearly $500 billion in loans to foreign investors. A Huarong default could lead some international bondholders to sell their bonds in Chinese state-owned enterprises, and make it more difficult for Chinese companies to borrow from foreign investors, a critical source of funding.
Concerns about the company’s ability to raise fresh money prompted two ratings agency to put Huarong on a “watch” notice — a type of warning that means its debt could be downgraded, a move that would make its ability to borrow even more costly.