Huarong Risks May Delay Withdrawal Of PBOC Stimulus, Economists Say

(Bloomberg) – The heightened financial stability risks surrounding China Huarong Asset Management Co. could prompt the central bank to proceed more cautiously by reducing its monetary support this year.

Speculation of a possible debt restructuring by one of the country’s largest public finance companies recently rocked markets, raising concerns about contagion. While those fears appear to have subsided in recent days, financial risks persist across the economy as Chinese companies default on local bonds at the fastest pace on record this year.

Against this backdrop, economists say the People’s Bank of China will take longer than expected to reactivate its pandemic stimulus. The central bank did not comment directly on Huarong, but in its quarterly report released on Tuesday, the BPC hinted at financial risks while downplaying inflation fears, suggesting that its policy will remain neutral for now.

Read more: PBOC joins Fed to minimize inflation as main risk: China today

“Concerns about financial risks will affect the pace of China’s monetary policy normalization,” said Wang Tao, chief economist for China at UBS AG. Emerging credit risks are one of the main reasons for the authorities’ pledge not to drastically change policy this year, she added.

The PBOC’s latest report reflects comments from the Communist Party’s Politburo meeting last month, when leaders vowed to prevent and resolve economic and financial threats. The central bank highlighted the financial pressures on local governments and insisted that a system be created that would hold local officials accountable for major financial risks.

As the economic recovery deepens and last year’s credit surge fuels fears of asset bubbles, markets are looking for clues as to how quickly the PCB plans to withdraw its stimulus measures. So far, the central bank has kept the benchmark prime rate unchanged over the past year and has largely avoided injecting or draining liquidity through daily open market operations over the past two months. .

Huarong’s inability to release 2020 financial results sparked weeks of turmoil in the bond market. The bad debt manager owes domestic and international bondholders the equivalent of $ 42 billion, making it one of the most owned Chinese state-owned enterprises in the world. Any default would defeat the fundamental market assumption that the government will always provide assistance to large public enterprises in times of difficulty.

Read more: The Very Bad Chinese Bank: Inside the Huarong Debt Debacle

“If the market thinks Huarong’s debt problem is not being handled well, it could trigger concerns across the entire SOE sector and cause a systemic contagion effect,” Wang said.

Leverage ratio

Huarong’s offshore bonds fell in April as investors panicked at the prospect of a loss in a possible debt restructuring, even as the company insists it can repay its debts. Huarong has so far fulfilled all of its obligations on time and said it is operating normally with sufficient liquidity. China’s banking and insurance regulator also said Huarong has sufficient liquidity.

China’s macroeconomic leverage ratio, the ratio of debt to gross domestic product, fell 2.6 percentage points in the first quarter to 276.8%, as the PCB said on Tuesday that the country had successfully guarded against any occurrence of systemic risks. The central bank will improve the mechanism for preventing and resolving bond default risks and crack down on any attempts to evade debt, she said.

The Politburo’s suggestion to create a mechanism that holds local officials accountable for financial risks could mean that the government is more concerned about the potential ripple effect of increasing credit defaults and bad debts, Wang said.

“Huarong is a large financial institution, majority owned by the Ministry of Finance. If even institutions like these risk restructuring, policymakers should consider whether other public and private enterprises face similar risks, ”said Liu Li-Gang, managing director and chief economist of China. at Citigroup Inc.

With China’s non-financial corporate debt having soared over the past decade to over 160% of GDP, heavily indebted companies will suffer from increased debt repayment costs if monetary policy is tightened too quickly. Liu said. A hasty withdrawal of stimulus measures could potentially lead to “major unrest and tension in the financial markets,” he said.

© 2021 Bloomberg LP

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