Although Lai Xiaomin was accused of corruption, people familiar with the matter said that the aggressive lending activities of Huarong Asset Management Co., Ltd. and the large number of risks brought about by it were also important factors in Lai Xiaomin's downfall.
Chinese authorities have arrested the former leader of one of the country's largest financial asset managers.There are cracks in the risk-laden investment-banking empire he helped build.
Lai Xiaomin, the former chairman of China Huarong Asset Management, was arrested by a local prosecutor's office, state media reported on Wednesday.Huarong is a powerful asset management and bad debt investment institution.
The details of the case were not officially disclosed, but Lai Xiaomin was investigated by China's anti-corruption agency earlier this year.He had previously been expelled from the party because he was accused of accepting bribes and blindly expanding and operating in a disorderly manner, causing Huarong, with total assets of 1.87 trillion yuan ($270 billion), to seriously deviate from its main business of distressed debt investment.
Caixin, a respected Chinese financial magazine, reported earlier this year that authorities had found three tons of cash at Lai Xiaomin's property.
Lai Xiaomin's downfall began when he was detained in April in an anti-corruption investigation.The case comes as Beijing cracks down on excessive leverage at home and abroad, and Huarong, under his leadership, thrived in high-return lending.
Since Lai Xiaomin's detention, Huarong and three other Chinese state-owned asset management companies -- Cinda, Orient and Great Wall -- have been forced to scale back their aggressive overseas bases in Hong Konginvestment banking.Investors also pointed to the risks associated with Huarong's excessive lending.
Inside China, the main business of Huarong and three other asset managers has been buying up bad debts from domestic banks for years to help them cope with rapidly deteriorating asset quality.
In Hong Kong, however, these companies, through multiple subsidiaries, have built large investment banking operations, borrowing cheaply from debt capital markets and then lending at high interest rates to Chinese companies that have been shut out by banks.The asset managers are also among the major Asian investors in high-yield bonds.
Huarong has issued more than $50 billion in dollar-denominated bonds since 2014, far more than its three other bad-bank peers.
Over the past five years, some clients of Huarong's offshore lending business have experienced financial stress or been the target of government scrutiny.One such client is CEFC China Energy, whose chairman was detained this year after the company tried to buy a large stake in Rosneft.HNA, Zhonghong Holdings, Hanergy and Huishan Dairy -- all of which are under financial stress -- have also borrowed from Huarong.
By mid-2017, that business put Huarong in the bullseye of China's crackdown on excessive leverage.Although the relevant Chinese authorities claimed that Lai Xiaomin was corrupt, people with direct knowledge of the company said that Huarong's aggressive lending activities and the large number of risks brought about by it were important factors in Lai Xiaomin's downfall.
Last month, activist investor David Webb mapped a highly leveraged network of 26 companies, mostly Hong Kong-listed companies and financial institutions, that rely on Huarong as a core source of funding.His report paints a picture of concerns about the willingness of some Chinese financial institutions to fund Hong Kong companies that take high risks.
As Huarong scales back its offshore lending business, the high-yield debt market and mid-sized Chinese companies needing offshore funding have already felt the impact.An analyst earlier this year pointed out that this caused a domino effect.
Translator/He Li
