China Huarong Asset Management Co., Ltd. was a majority state-owned financial asset management company in China, with a focus on distressed asset management. On 30 June 2020, Huarong had around CNY1.7tn in total assets. It missed the deadline for its 2020 annual report filing to the SEHK at the end of March 2021, and its shares were suspended from trading after 1 April 2021. A major concern the investors had about the company was a direct result of the execution of its former chair, Lai Xiaomin, in January 2021 for financial crimes involving the abuse of power to allocate credit through Huarong. In April 2021, offshore US dollar bonds issued by Huarong plunged in value, and credit agencies downgraded the company’s ratings as an issuer and as a company. There was also pressure on Huarong for the repayment of around CNY143bn in Chinese corporate debt due at the end of 2021. In order to reduce the risk of the market tumbling and to assist Huarong’s cash flow, Chinese regulators asked Chinese banks to provide loans to the company, in order to stabilize the banking industry. In addition, the regulators suggested Huarong had the option of restructuring.
After studying the case, students will be able to:
- Understand the impact of the actions of chairman/director(s)/senior management on a company’s corporate governance, the investors’ confidence and therefore the share value of the company;
- Realize the negative effects brought by the delay in filing annual report of a listed company on the confidence of the capital market and on the increase of its external financing costs;
- Appreciate the significance of the doubts placed on a financial institution’s solvency, and the negative impact on the financial institution’s credit ratings as an issuer and as a company, as well as how they affect the financial institution’s issued bond prices; and
- Learn the accounting principles used by Huarong in equity accounting, and in the impairment of financial assets and other assets.