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Huarong Contagion Risk Resurfaces at Peers That Owe $454 Billion

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(Bloomberg) -- A selloff in China Huarong Asset Management Co.’s bonds is once again broadening to the nation’s other major bad-debt managers, raising the stakes for Beijing as it weighs an industry overhaul.

Dollar notes issued by China Cinda Asset Management Co., China Orient Asset Management Co. and Great Wall Asset Management Co. are falling at the fastest pace since a knee-jerk tumble in April after Huarong shocked investors by failing to publish annual results.

The three Huarong peers have combined liabilities of 2.9 trillion yuan ($454 billion), including $28 billion of outstanding dollar bonds, according to their latest financial statements and data compiled by Bloomberg.

Contagion risks are rising as investors look for more clarity on the fate of an industry that has effectively been shut out of the dollar bond market since fears of a Huarong default began swirling two months ago. China’s finance ministry is considering transferring its controlling stakes in the bad-debt managers to a new holding company, Bloomberg News reported Tuesday, raising questions over whether the government is preparing a broad shake-up.

“Due to the prolonged delay of Huarong’s 2020 results and increasingly complex restructure potential, investors are increasingly examining exposure to China AMCs,” said Dan Wang, an analyst at Bloomberg Intelligence.

Investors demanded a 249-basis point yield premium over Treasuries to hold a China Cinda unit’s 2031 dollar note on Wednesday, the most since mid-April. The spread on a China Orient unit’s 2030 bond increased to 245 basis points, the widest since the note was issued in November.

Huarong’s dollar bond due 2025 was indicated at 70 cents on the dollar, while its 4.5% perpetual was at 60 cents, Bloomberg-compiled prices show. The company had its credit rating affirmed at BBB+ by S&P Global Ratings on Wednesday, though the ratings firm kept its negative outlook.

China’s four bad-debt managers were created in the aftermath of the Asian financial crisis, when decades of government-directed lending to state companies had left the country’s biggest banks on the brink of insolvency. The bad-debt firms have since expanded beyond their original mandate, creating a labyrinth of subsidiaries to engage in other financial businesses and borrow billions from the bond market. Huarong was the most aggressive of the four under former Chairman Lai Xiaomin, who was executed in January for crimes including bribery.

None of the firms have tapped the offshore bond market since the Huarong rout began. The last sale of dollar debt by any of the bad-debt managers and their units was China Cinda HK Holdings Co.’s $2 billion offering in January.

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