China Huarong said to be ready to repay S$600 million of bonds due at the end of the month

Author: Justin Low | Category: News

Shanghai Securities News reports on the matter

China
Central banks across the globe have mitigated credit risks rather well during this unprecedented time but in China, worries are starting to surface again amid the whole Huarong debacle over the past two weeks or so.

Huarong is China's largest distressed asset manager and has come under intense scrutiny amid fears of bond defaults and potential bankruptcy after having failed to publish its 2020 preliminary results by the 31 March deadline.

But what exactly is the big deal surrounding Huarong?

For some context, Huarong is majority owned by the Chinese government. The firm's biggest shareholder is the Ministry of Finance and given its size, there hasn't quite been a case of such a high profile state-owned name defaulting on its debt in China.

In the past week or so, there has been plenty of worries in the Chinese credit market with Huarong bonds being sold off heavily - pushing up the yields seen in investment-grade and high-yield corporate bonds.

As much as the payment above may be a bit of a comfort, it may just be temporary until there is better clarity on how Chinese authorities are going to deal with this.

Huarong has some $43 billion left in outstanding bonds with offshore issuance accounting for about half of that. What makes things murkier is that there aren't much details about the onshore holdings - which could be held by banks, insurers, corporates, or other fund houses. Hence, the potential reverberations that could arise from Huarong's default, if it happens, is still very much up in the air.

We'll see how all of this unfolds moving forward but my opinion is that China will never allow such a high-profile name such as Huarong collapse. It is too big a risk and spells out a very dangerous outlook for the bond/credit market.

The fear is that all of this could trigger more systemic risk, or at least the fears of it, and that could also spill over to emerging markets and risk sentiment across the globe.

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