Central Huijin, China’s sovereign wealth fund, has taken control of key state firms, including bad-debt managers and China Securities Finance Corp, through a transfer from the Ministry of Finance. This consolidation aims to enhance the capacity to manage financial challenges in the market, alleviate local government debt, and ensure continued economic stability.

On February 14, a significant shift in China’s financial landscape was observed as numerous listed companies announced a change in shareholders to Central Huijin, the domestic arm of China Investment Corp. This adjustment involves the management of key state firms and aims to consolidate state-owned enterprises’ influence in the domestic stock market, potentially enabling them to tackle complex financial challenges.

The restructuring includes the Ministry of Finance (MOF) transferring its stakes in three bad-debt managers, as well as the China Securities Finance Corp (CSFC), to Huijin without compensation. As of June last year, Huijin held assets worth 7.76 trillion yuan ($1.1 trillion), and this latest shift allows it to oversee firms with assets amounting to approximately $27 trillion, significantly reinforcing its financial portfolio.

The newly acquired entities have historically been involved in critical market recovery efforts. For instance, CSFC was established to provide financing to brokerages in 2011 and later became a vital player during the 2015 stock market crisis. Alongside Huijin, it supported a massive influx of state funds into listed companies, influencing over 1,200 firms and contributing nearly 3% of the overall Chinese market value.

These bad-debt managers emerged following the Asian financial crisis in 1999 when China’s banks faced insolvency. The government initiated special sovereign debt issuance to revitalize economic growth and re-capitalize banks, subsequently transferring problematic assets to asset management companies (AMCs).

Presently, Chinese regulators are encountering similar issues, prompting them to bolster stock prices. Beijing’s strategy includes proposing the issuance of special debt in trillions of yuan to assist banks and manage local government debt, indicating a comprehensive approach to these financial challenges.

The recent consolidation aids in removing potential conflicts of interest at the MOF, which has historically acted both as a regulator and principal shareholder of certain market-focused SOEs. The four AMCs, originally intended to conclude operations after ten years, have expanded their roles and become critical players in China’s shadow banking system.

Huarong, one of the major AMCs, exemplified these complications, nearly defaulting on $20 billion in foreign debt amid governance issues. The recent delayed confirmation of the stake transfer to Huijin signals that the reorganization strategy encompasses more nuanced financial management considerations.

The strategic reallocation allows Central Huijin to focus on optimizing financial resources. It may also streamline the AMCs back to their core objective of addressing bad debt, which is increasingly urgent as local government debt reaches staggering levels.

Beijing is wary of repeating extensive bailout measures from the late 1990s, which previously cost the state approximately 270 billion yuan for bank recapitalization. An equivalent operation today would be exponentially more costly, potentially amounting to $3.6 trillion, which necessitates a more moderated financial strategy to alleviate local government project stresses.

Despite potential criticisms regarding postponed reforms, the authorities can prioritize immediate measures aimed at restoring asset values, an established method for enhancing consumer confidence. The chair of the China Securities Regulatory Commission, Wu Qing, noted that a potential “market stabilization fund” is under consideration, indicating Huijin’s pivotal role in supporting market stability initiatives.

Huijin’s expanded authority brings heightened accountability, positioning it as the leader of a more efficient “national team.” Its primary objective will be to bolster confidence across both the stock market and the broader economy, a formidable undertaking in the current financial climate.

In summary, the recent reorganization of financial control under Central Huijin serves to strengthen China’s approach to tackling imminent economic challenges. The transfer of stakes in critical bad-debt managers and CSFC fosters a unified strategy that optimizes financial resources. This realignment not only streamlines oversight but escalates the responsibility for Huijin to maintain market confidence, ultimately aiming to stabilize the economy amidst rising local government debts and ongoing financial complexities.

Original Source: www.tradingview.com

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