Why uncertainty over China Huarong has echoes of Europe’s debt crisis

Concerns about Greece’s huge public debt burden and the mispricing of risk across the euro zone predated the eruption of Europe’s crisis

Likewise, weaknesses in China’s corporate bond market, and uncertainty over Beijing’s support for troubled SOEs, have been weighing on sentiment

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It is highly unlikely that Beijing would allow a systemically important SOE like China Huarong Asset Management to go under. Photo: Reuters

Published: 2:30pm, 6 May 2021Updated: 10:31pm, 6 May 2021

On the face of it, the mounting concern over the financial health of China Huarong Asset Management, a distressed debt manager majority-owned by China’s finance ministry, bears little resemblance to the panic that engulfed financial markets a decade ago when Greece’s debt default and possible exit from the euro zone fanned fears about the stability and integrity of Europe’s monetary union.

While the euro zone faced an existential crisis in 2011-12, exacerbated by full-blown sovereign and bank defaults, China is enjoying a rapid recovery from the Covid-19 pandemic and is trying hard to rein in the excesses of recent years.

More importantly, the Communist Party rules China with an iron fist. Policymaking in the 19-member euro zone, by contrast, is akin to herding cats.

Yet, in one crucial and sensitive area for investors – increasing uncertainty about backstops and whether private creditors should be penalised for failing to price risks accurately – the drama around Huarong and the tensions at the heart of Europe’s debt crisis are eerily similar.

Some of the hot-button issues thrown up by the near dissolution of the euro zone – tensions between efforts to reduce moral hazard and the preservation of financial stability, credit rating agencies’ role in flagging up risks and the threat of widespread financial contagion – have reappeared in China’s corporate bond market.

Just as concerns about the sustainability of Greece’s huge public debt burden and the mispricing of risk across the euro zone predated the eruption of Europe’s debt crisis, weaknesses in China’s corporate bond market, and uncertainty over Beijing’s support for troubled state-owned enterprises, have been weighing on sentiment for some time.

Why uncertainty over China Huarong has echoes of Europe’s debt crisis

Concerns about Greece’s huge public debt burden and the mispricing of risk across the euro zone predated the eruption of Europe’s crisis Likewise, weaknesses in China’s corporate bond market, and uncertainty over Beijing’s support for troubled SOEs, have been weighing on sentiment

Concerns about Greece’s huge public debt burden and the mispricing of risk across the euro zone predated the eruption of Europe’s crisis

Likewise, weaknesses in China’s corporate bond market, and uncertainty over Beijing’s support for troubled SOEs, have been weighing on sentiment