China Huarong Asset Management Co. ultimately proved too big to fail, but its protracted bailout process demonstrates Beijing¡¯s determination to punish creditors who ignore risks in heavily indebted companies.
The almost five-month saga triggered some of the most extreme swings ever for an investment-grade Chinese bond issuer, changing the way even seasoned money managers evaluate the nation¡¯s $12 trillion credit market. While some Huarong bonds rallied to 97 cents on the dollar after the company unveiled a recapitalization by state-backed investors late Wednesday, the rescue came too late for many bondholders who sold at heavy losses earlier this year.
For President Xi Jinping¡¯s government, there¡¯s a lot to like about a Huarong resolution that introduces more market discipline without the need for a messy default that could stoke broad financial contagion. The risk is that this muddle-through strategy ¡ª and Beijing¡¯s opaque approach to dealing with troubled borrowers ¡ª drives away investors who want more clarity on the rules of the game in Chinese credit.
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