On February 14, Central Huijin took control of several significant financial entities from the Ministry of Finance, enhancing its ability to address China’s economic challenges. This move consolidates oversight of key assets, including bad-debt managers and the CSFC, positioning Huijin to respond effectively to financial strains while navigating the complexities of China’s economic landscape.

On February 14, investors in China noticed significant changes as many listed companies announced that Central Huijin, the domestic arm of the China Investment Corporation and a sovereign wealth fund, was becoming a new shareholder. This development enables Huijin to take control of several state-owned firms, significantly influencing the domestic stock market and increasing its capacity to manage the country’s financial challenges.

The restructuring involves the Ministry of Finance transferring its controlling stakes in three bad-debt managers and the China Securities Finance Corporation (CSFC) to Huijin without incurring any costs. This move enhances Huijin’s extensive portfolio, which already included investments worth approximately 7.76 trillion yuan (about $1.1 trillion) as of June, by overseeing companies with combined assets of at least $27 trillion, according to Breakingviews.

The new entities under Huijin have been pivotal in recent market interventions. The CSFC was established in 2011 to provide essential margin financing and was later central to the “national team” response during the stock market downturn between 2015 and 2016, making significant investments in over 1,200 publicly traded companies, valued at around 1 trillion yuan ($152 billion).

The history of the bad-debt managers dates back to 1999, following the Asian financial crisis, when Chinese banks faced insolvency. The government established asset management companies (AMCs) to handle troubled assets and local government debt. Today’s economic landscape presents similar challenges, prompting the government to intensify support for stock prices and plan for extensive debt issuance to stabilize the banking sector and manage local government liabilities.

This latest restructuring also seeks to reconcile potential conflicts of interest that arose from the Ministry of Finance’s dual roles as both regulator and significant stakeholder in the market-oriented state-owned enterprises. The AMCs, originally set up to mitigate financial risks, have instead expanded their influence within China’s shadow banking sector, with Huarong as a prominent example of mismanagement.

Notably, following a report that Huijin would control the remaining AMCs, delayed finalization indicated the necessity for a strategic overhaul rather than mere stake transfers. The transfer enables Huijin to focus on optimizing financial assets while the Ministry of Finance addresses broader public financial management issues. This shift may reinstate the AMCs’ original focus on managing bad debt.

The importance of addressing local government financial strains is underscored by the staggering 47 trillion yuan in local government debt, compounded by an additional estimated 60 trillion yuan in contingent liabilities. Unlike past bailouts that entailed substantial sovereign bond issuance, the complexities of today’s economy necessitate a more nuanced approach.

Given that today’s GDP and financial issues are significantly larger, an equivalent bailout would exceed $3.6 trillion. An empowered Huijin can facilitate the restructuring of distressed local projects and leverage brokerages’ reforms to reinforce investor confidence.

Regulators, such as Wu Qing, chair of the China Securities Regulatory Commission, have suggested a potential “market stabilization fund” to bolster market confidence. Huijin’s acquisition of CSFC positions it to play a vital role in this effort, allowing it to stabilize the market when necessary.

As the leader of a consolidated national team, Huijin is tasked with reinforcing confidence across China’s financial markets and economy amidst increasingly significant responsibilities. This transition marks a new chapter in addressing the complex financial landscape of China, making it a formidable but challenging undertaking.

The recent transfer of control over key financial entities to Central Huijin signifies an important strategic move in managing China’s economic challenges. As the new financial captain, Huijin is positioned to tackle pressing issues such as local government debt and stock market stabilization, reflecting the need for comprehensive oversight in a complex and evolving financial environment. The upcoming activities will determine Huijin’s effectiveness in restoring confidence and addressing systemic risks.

Original Source: www.tradingview.com

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