We all want the financial system to operate smoothly but even experts can overlook the footnotes and step into a quagmire of bad investments. Picture: BLOOMBERG
And right now, all eyes are on a contagious dollar bond rout spurred by China Huarong Asset Management, once impeccably investment grade and secure in the public eye because it is majority-owned by the ministry of finance. With its high ratings, Huarong’s issues could have been collateralised for up to 90% of their market value, enabling holders to buy even more assets elsewhere. But that is history.
The Big Three ratings agencies have already put Huarong on a negative credit watch — a prelude to a possible downgrade. Talks of margin calls swirled — how else do you explain the sell-off of high-yield bonds issued by real estate developers, a completely different category? Was it spillover? Investors raising cash to cover a Huarong bet? There is definitely long fund panic selling: Huarong is now offering higher yield than China Evergrande Group, the nation’s most indebted developer.
Some, including this columnist, see this potential stake transfer as the ministry of finance distancing itself from Huarong. If you believe in “strong government support,” I’ve got fairy tales to tell you. Indeed, hard reality is hitting Huarong’s bond prices as investors finally brush aside the sellside commentary. The 4.25% perpetual bond was seeing bids at only 57c on the dollar on Wednesday.