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One Bad Apple Ought to Make All Bad Banks Reflect

Now's a good time for China's soured-loan managers to focus on what's core.
Photographer: Nelson Ching/Bloomberg
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So it appears one of China's most-prominent bad banks also has a bad apple.

Lai Xiaomin, party chief and chairman of state-controlled China Huarong Asset Management Co., is under investigation for "disciplinary and legal violations," the Central Commission for Discipline Inspection said in a statement.

The news sent shock waves across Asia. Since taking office in 2012, Lai has built Huarong into a household name in China, with multiple listings in Hong Kong and a mega-IPO pending in Shanghai.

Under his stewardship, assets soared to $287 billion, from $50 billion five years ago. But distressed debt -- the company's core -- actually shrank to 27 percent of the total, from 34 percent in 2014, as Huarong branched into everything from banking to securities and trust loans.

In a way, Beijing's soured sentiment toward Lai isn't surprising. Deleveraging is one of Beijing's top economic priorities, and it seems Lai didn't get the memo. Witness Anbang Insurance Group Co., whose debt-fueled global empire is being dismantled; former chairman Wu Xiaohui was recently tried for fraud after the government seized the company in February.

Backed by the Ministry of Finance, Huarong's raison d'etre is to help China's state-owned banks offload nonperforming advances. But it's hardly been doing its job. A multitude of other financial products including bonds and real-estate investments make up a large part of its asset portfolio.

Gone Rogue

Managing distressed assets accounted for just over half of China Huarong's total income last year

Source: Company filings

Note: Financial services includes trading securities such as stocks and bonds. Asset management & investment includes trusts and private equity.

In an interview with the Financial Times in August, Lai said there was a bubble forming in China's distressed debt market as newcomers with little experience pushed up prices at auction. That sounds like an excuse to mask the easy money Huarong was making. Over the past two years, the firm has become an active player in the offshore dollar bond market, using its quasi-sovereign credit status to issue cheap debt and the proceeds to buy high-yielding developers' notes.

Strategic Thinking

Huarong has been using proceeds from offshore dollar bond sales to buy high-yielding debt

Source: Bloomberg

Caixin, which first broke the story on Anbang's Wu, reported Wednesday that Lai got into trouble because Huarong has been funding large sums to Ningxia Tianyuan Manganese Industry Co., which claims to have 40 percent of China's electrolytic manganese market, and in turn using Tianyuan as its own shadow bank. Last year, Huarong had 162 billion yuan ($26 billlion) in loans to customers on its books.

To be sure, Huarong isn't doing anything out of the ordinary. China Cinda Asset Management Co. isn't managing much bad debt either. Distressed assets accounted for only 43 percent of its total in 2017. Last November, another of the nation's bad banks, China Great Wall Asset Management Co., was part of a consortium that purchased a portfolio of shopping malls in Hong Kong.

Not Alone

China Cinda also generates only about half of its income from distressed debt management

Source: Company filings

With the leeway China's bad banks have, it's easy for something to go wrong. The big four, 1 backed by their unique mandate, own licences across the financial sector. Huarong has a bank (Huarong Xiangjiang Bank Corp.), a brokerage (Huarong Securities Co.), a trust (Huarong International Trust Co.), and a real estate arm. The spotlight instead seems to have swung onto China's state-owned lenders, which are under intense pressure to curb risks in the wealth management industry.

With Lai under investigation, Huarong and its peers are surely beginning to feel the heat. They should use this moment to take a good look at their businesses and reflect on what's core.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. China's four bad banks, set up by Beijing in the late 1990s to absorb soured loans, are  China Cinda Asset Management Co.,  China Huarong Asset Management Co., China Orient Asset Management Corp. and China Great Wall Asset Management Corp. 

To contact the author of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net

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