Investors had previously shrugged off governance problems at Huarong, China’s largest distressed debt manager. The assumption had always been that the firm’s ties to the Ministry of Finance would insulate creditors from any solvency issues. But talk of a financial restructuring has called this into question and the price of Huarong’s bonds have plunged lately.
This is part of a broader campaign to improve the pricing of credit risk. A State Council directive published this week also called for a reduction in state support to local government financing vehicles, where defaults are still comparatively rare.
These developments should be positive for credit allocation in the long-run. But in the short-run they add to financial stability risks and, even if these remain contained, will weigh on economic activity.
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