China Huarong’s Issue Calls For Serious Reflection – Analysis


By Wei Hongxu

On March 19, China Huarong Asset Management announced on the Hong Kong Stock Exchange that its estimated net loss attributable to ordinary shareholders for the year 2022 is approximately RMB 27.6 billion after preliminary calculations.

Huarong also stated that it expects to record a net loss of HKD 2.1 billion to HKD 2.35 billion for the year 2022, compared to a net loss of HKD 1.6 billion in the same period last year. As it stands, such massive losses appear to have dragged down the performance of the entire Huarong Group. China Huarong was established on November 1, 1999, as one of the four state-owned financial asset management companies created to address the Asian financial crisis, resolve financial risks, promote state-owned bank reform, and help state-owned enterprises get out of difficulties.

On September 28, 2012, with the approval of the State Council, the company was restructured into a joint-stock company. On October 30, 2015, it was listed on the Main Board of the Hong Kong Stock Exchange. In August 2021, a series of factors like the corruption of the company’s then leaders, as well as the strengthened financial supervision, and the crisis in the real estate sector, Huarong had to undergo restructuring in the face of massive debts. It was recapitalized by five state-owned financial institutions, including Citic Group, and underwent a series of restructurings.

Under these circumstances, the huge losses incurred by Huarong in 2022 are not surprising. At the end of last year, Huarong disclosed that it would incur a loss of RMB 18.8 billion in the first half of 2022 if it achieved a profit in 2021. After being taken over by Citic Group and other state-owned financial institutions due to huge losses in August 2021, China Huarong’s restructuring and equity changes were not completed until November 2022. At the same time, its actions to dispose of related assets have also continued, with the relevant gains and losses recorded in the current financial statements. During the restructuring, Huarong disclosed that its net loss for 2020 was RMB 103 billion (approximately USD 15.9 billion) due to massive asset write-downs. As of the end of 2021, its total assets reached RMB 1.5684 trillion, its total revenue in 2021 was RMB 93.067 billion, its net profit was RMB 1.986 billion, and its net profit attributable to shareholders was RMB 378 million. According to the company’s interim performance report for 2022, as of the end of June, China Huarong Group’s total assets amounted to RMB 978.315 billion, a decrease of 37.6% from the end of the previous year. By divesting financial license-related subsidiaries, the company reduced its combined assets by RMB 590.107 billion from the end of the previous year. Based on disclosed information, it believes that the main factors affecting its full-year performance are, first of all, the fair value of some equity-based financial assets has dropped significantly due to capital market fluctuations, resulting in substantial floating losses. Secondly, the optimization and adjustment of its business layout have resulted in a temporary reduction in the scale and revenue of acquisitions and the restructuring of non-performing debt assets. Finally, there is credit impairment losses increased due to the macroeconomic situation and the downturn in the real estate industry.

In 2022, China Huarong was revealed to have suffered significant losses, which were linked to its own historical problems, indicating that the company is still grappling with substantial challenges during its restructuring and transformation. The real estate market’s downturn further complicated Huarong’s transformation process, and it has been significantly impacted operationally. On March 17, the Ministry of Finance announced on its official website that it had lawfully imposed administrative penalties on both Deloitte and Huarong due to China Huarong’s audit deficiencies from 2013 to 2019.

Huarong’s problems, which have gradually surfaced, are multifaceted. They not only involve corrupt leadership but also internal control mechanism defects and significant issues like financial fraud. The enormous losses incurred were not just due to the corrupt practices of former chairman Lai Xiaomin but also reflected its strategic errors of excessive involvement in the real estate market. There were also defects and blind spots in the management of financial state-owned assets and financial regulation, resulting in Huarong becoming an eye of the storm in financial risk.

Huarong’s problems did not escalate into systemic financial risks due to state-owned financial capital involvement. However, the issues raised regarding state-owned capital management and financial supervision have led to several pertinent questions. ANBOUND’s researchers consider the following questions to be of utmost importance: Firstly, why were Huarong’s unlawful operation, investment and acquisition, and interest transfer unregulated and overlooked for so long? Who is responsible for Huarong’s regulation, and why did the company’s internal control mechanisms fail to operate? What kind of mechanism problem does this reveal? Secondly, how could Lai Xiaomin’s corruption and illegal activities persist for a decade, from 2008 to 2018? What are the loopholes in state-owned financial institutions’ management mechanisms that allowed this to happen? Thirdly, China’s financial capital management remains unclear from a financial system perspective. Although the Ministry of Finance has the responsibility of management as a shareholder, state-owned financial resources are managed by multiple groups, leading to significant loopholes and a prominent problem of “agent” ineffectiveness.

From the problems exposed by Huarong, the integration of the financial regulatory system at the national level and the promotion of the reform of the management mechanism of state-owned financial capital do appear to be measures taken to mend such problems. Mixed supervision of financial holding groups, to a certain extent, has a positive effect on the management of asset management companies, as can avoid loopholes and blind spots in segmented supervision.

Additionally, the State Council’s institutional reform includes exploring the reform of the financial capital management model, indicating that related mechanism construction and reform are being put on the agenda. To avoid significant financial losses, anti-corruption efforts will need to be deepened, where the management mechanism of state-owned capital must be further streamlined. Achieving effective management of state-owned capital requires reflection on risk issues and persistent exploration and attempts. This will allow Huarong to be freed from historical burdens, and state-owned financial capital to avoid continuous problems caused by fraud and corruption, resulting in a virtuous circle in the financial field.

Final analysis conclusion:

Based on the information disclosed by China Huarong, the company is expected to incur a net loss of RMB 27.6 billion in 2022. This presents a significant challenge for the company’s transformation and restructuring, which not only carries the burden of its massive historical losses but also must navigate a changing economic and financial landscape. For Huarong to begin anew, it will require not only assistance from state-owned entities but also a comprehensive review and reflection on the experiences and lessons learned from its past failures.

Wei Hongxu is a researcher at ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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