1/9
Very good article by Alexandra Stevenson (@jotted), @KeithBradsher and @caocli on the conundrum Beijing faces with Huarong. Huarong is a balance-sheet mess, and this has been widely known for many years, so it was never really a surprise that it...
nytimes.com/2021/05/18/bus…
Very good article by Alexandra Stevenson (@jotted), @KeithBradsher and @caocli on the conundrum Beijing faces with Huarong. Huarong is a balance-sheet mess, and this has been widely known for many years, so it was never really a surprise that it...
nytimes.com/2021/05/18/bus…
2/9
would eventually run into payment difficulties. In the past, however, because MoF owns over 60% of Huarong, Chinese banks and bond investors always refinanced the company's debt on the assumption that the government would support its credit.
would eventually run into payment difficulties. In the past, however, because MoF owns over 60% of Huarong, Chinese banks and bond investors always refinanced the company's debt on the assumption that the government would support its credit.
3/9
In recent years however the regulators – extremely worried by China's weak lending discipline, and eager to bring the country's debt burden under control – have been trying to convince creditors that they could no longer count...
In recent years however the regulators – extremely worried by China's weak lending discipline, and eager to bring the country's debt burden under control – have been trying to convince creditors that they could no longer count...
4/9
on government support hazard, and when rumors spread last month that Huarong was facing payment difficulties, the regulators kept very conspicuously silent. The inevitable result was a bond-market panic that threatened to get out of control.
on government support hazard, and when rumors spread last month that Huarong was facing payment difficulties, the regulators kept very conspicuously silent. The inevitable result was a bond-market panic that threatened to get out of control.
5/9
So, as this article makes very clear, the regulators face the same problem they have faced for years. On the one hand they cannot directly or indirectly bail out Huarong without reinforcing moral hazard and yet again rewarding investors for ignoring market discipline.
So, as this article makes very clear, the regulators face the same problem they have faced for years. On the one hand they cannot directly or indirectly bail out Huarong without reinforcing moral hazard and yet again rewarding investors for ignoring market discipline.
6/9
On the other hand they cannot walk away from Huarong without destabilizing China’s financial markets and perhaps setting off a self-reinforcing sequence of defaults.
In the past they have always chosen stability over efficiency, and they will probably do the same again.
On the other hand they cannot walk away from Huarong without destabilizing China’s financial markets and perhaps setting off a self-reinforcing sequence of defaults.
In the past they have always chosen stability over efficiency, and they will probably do the same again.
7/9
But I would add something that most other analysts have failed fully to recognize, and that is how little room the regulators have to decide. As long as Beijing insists on GDP growth rates that exceed the underlying economy’s real capacity, there is no way...
But I would add something that most other analysts have failed fully to recognize, and that is how little room the regulators have to decide. As long as Beijing insists on GDP growth rates that exceed the underlying economy’s real capacity, there is no way...
8/9
Beijing can prevent bad debt from rising sharply. If banks and investors are forced to operate under hard budget constraints, however, it will be impossible for local governments to fund the activity needed to achieve the GDP growth targets.
ft.com/content/907740…
Beijing can prevent bad debt from rising sharply. If banks and investors are forced to operate under hard budget constraints, however, it will be impossible for local governments to fund the activity needed to achieve the GDP growth targets.
ft.com/content/907740…
9/9
Moral hazard, in other words, isn’t some unfortunate characteristic of China’s financial system that can be fixed with the right policies. It is fundamental to the way Beijing’s growth model works. Beijing must backstop the credit markets until it gives up targeting growth.
Moral hazard, in other words, isn’t some unfortunate characteristic of China’s financial system that can be fixed with the right policies. It is fundamental to the way Beijing’s growth model works. Beijing must backstop the credit markets until it gives up targeting growth.
As expected, while the regulators continue pretending to look away, Huarong is coming up with the funds needed to repay its debts.
bloomberg.com/news/articles/…
bloomberg.com/news/articles/…
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