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SHANGHAI, Aug 19 (Reuters) - Bonds issued by China Huarong Asset Management Co Ltd jumped on Thursday after the troubled bad loan company announced a state-backed rescue plan, easing fears of a possible “Lehman moment” in China.
Wednesday’s announcement of a capital restructuring came a day after a meeting chaired by President Xi Jinping called for efforts to defuse systemic financial risks. It also comes as a flurry of regulatory crackdowns in China dent foreign investors’ confidence.
Huarong, which has not yet published its 2020 annual report, warned investors of an annual loss of 102.9 billion yuan ($15.85 billion), and said a state consortium led by the Citic Group Corp had agreed to make a strategic investment in the company.
Despite the profit warning, Huarong said its liquidity was ample and it could repay outstanding offshore debts in time, boosting its bond prices.
Full details of the restructuring plans have yet to be announced, but a dollar-denominated perpetual bond issued by China Huarong International, a Huarong unit, surged nearly 30%, according to data provider Duration Finance. About a dozen other Huarong International bonds rose more than 10%.
In Shanghai, a Huarong Securities Co bond maturing in April, 2023 jumped 5%, according to exchange data.
Securities issued by China Evergrande Group, the country’s most indebted developer, also rose sharply, with a bond in Shanghai surging roughly 20%.
Li-Gang Liu, chief China economist at Citi, welcomed more clarity around Huarong’s restructuring plan.
Allowing systemically important companies such as Huarong and Evergrande to default would “potentially trigger systemic risks, and lead to China’s ‘Lehman Moment’”, Liu said.
“In the stock market, foreign institutional investors are already asking themselves: are Chinese assets investible?” Liu said, referring to the rout in tech shares triggered by Beijing’s latest regulatory crackdowns.
In the bond market, “the government should come forward and give the market more confidence. Otherwise, more foreign capital could be leaving China, which is not good for China’s economic stability and recovery.”
Huarong, one of China’s four state distressed debt managers, missed the March 31 deadline for filing its 2020 earnings, sparking a rout in its U.S. dollar-denominated bonds that spread to other Chinese issuers. Its former chairman was sentenced to death for bribery.
Huarong, which counts China’s finance ministry as its biggest shareholder, said late on Wednesday that it will issue new shares to Citic Group, China Insurance Investment, China Life Asset Management, China Cinda Asset Management and Sino-Ocean Capital Holding, without giving financial details.
The Beijing-based company said the profit warning mostly reflected a large change in provision for credit impairment.
Huarong’s Hong Kong-listed shares have been suspended since April 1. ($1 = 6.4919 Chinese yuan renminbi) (Reporting by SHANGHAI NEWSROOM; Editing by Rashmi Aich and Kim Coghill)