The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Ka Sing Chan

HONG KONG, March 11 (Reuters Breakingviews) - Attentive Chinese investors realised something unusual was happening on February 14. Dozens of listed firms simultaneously dispatched a circular announcing they had a new shareholder: Central Huijin. The domestic unit of China’s sovereign wealth fund, China Investment Corp, was about to take control of several state firms with sprawling interests in the country’s onshore stock market. The move creates a super-sized state-owned enterprise (SOE) with the capacity to confront China’s most complex financial challenges.

The potentially potent reshuffle involves the Chinese Ministry of Finance (MOF) transferring, at no cost, its controlling stakes in three bad-debt managers as well as China Securities Finance Corp (CSFC) to Huijin. The fund, already the major shareholder of China’s largest state-controlled banks and brokerages, held investments worth 7.76 trillion yuan ($1.1 trillion) as of June last year. The latest reshuffle expands its portfolio, giving it oversight of companies which have combined assets worth at least $27 trillion, Breakingviews calculates.

The newest members of the Huijin family have played key roles in Beijing’s most pivotal market bailouts. CSFC started out in 2011 providing margin financing to brokerages. Four years later, along with Huijin, it spearheaded the “national team” of state investors which pumped money into equities during the country’s stock market meltdown. At one point, the duo was among the top 10 shareholders in more than 1,200 listed companies, with total investments valued at roughly 1 trillion yuan ($152 billion), or nearly 3% of the Chinese market. The pair still own substantial stakes in hundreds of companies whose shares trade in Shanghai, Shenzhen and Hong Kong.

The bad-debt managers were created during another perilous moment for China’s economy and financial system. In 1999, in the wake of the Asian financial crisis, Chinese banks were insolvent. The People’s Republic responded by issuing special sovereign debt for the first time to reinvigorate growth and recapitalise its banking system. Authorities then transferred toxic assets, including tangled local government debt, to the new entities, which were known as asset management companies (AMCs).

Fast forward to today, and Chinese regulators face familiar challenges. The central government has been intensifying its policies to prop up stock prices. Beijing is also planning to issue special debt worth trillions of yuan which could be used to recapitalise banks and defuse local government debt risks. Putting all the entities involved in fighting previous financial fires under the same roof suggests a broader plan is taking shape.

In one sense, the latest revamp helps eliminate a conflict of interest for the MOF as both regulator and major shareholder of some market-oriented SOEs. The four AMCs – Huarong, Cinda, Orient and Great Wall – were supposed to be wound down after a decade, when they would have completed their policy goals. Instead, they were given financial licences to roam, forming trust companies and securities brokerages. As a result, they have grown into the biggest cogs of China’s shadow banking system.

Huarong is the most extreme example of how things ran out of control: the company nearly defaulted on over $20 billion of offshore debt after then-chairman Lai Xiaomin was targeted in an anti-graft investigation in 2018. Lai was founded guilty of taking bribes and executed in 2021. Huarong was subsequently absorbed by state heavyweight CITIC Group.

In January last year, an article by state-run Xinhua news agency, reporting that Huijin would take control of the three remaining AMCs, was deleted within hours. The fact that it then took Beijing more than a year to finalise the transfer suggests the reorganisation involves more than just shuffling stakes between different arms of the Chinese state.

Yet the rejig makes broad sense. Unlike the MOF, which is focused on managing China’s public finances, among many other things, Huijin can concentrate on optimising the vast financial resources now under its control. That could mean scaling back the three AMCs’ activities to their original mission of managing bad debt.

This role is more important than ever. Beijing has made easing the financial strains on local governments one of its top economic tasks, giving those authorities more fiscal power to better support the economy. Local government debt topped 47 trillion yuan last year, per the MOF, and the International Monetary Fund estimates that they owe at least another 60 trillion yuan through off-balance sheet financing vehicles.

Beijing is unlikely to attempt another “Big Bang” bailout. In the late 1990s, the People’s Republic issued 270 billion yuan of special sovereign bonds to recapitalise the banks while the AMCs mopped up 1.4 trillion yuan in toxic assets. At the time these were equivalent to about 20% of China’s annual output, which was about to take off upon joining the World Trade Organization.

Chinese GDP is much bigger now, and so are its financial problems. An equivalent bailout in the $18 trillion economy would cost the state around $3.6 trillion. An empowered Huijin is better positioned to buy Beijing some time by funnelling banking or insurance capital to restructure stressed local government projects. The array of brokerages under its scrutiny can also use securitisation to help state firms exit their investments.

That might sound like the authorities once again postponing difficult decisions. Yet it would enable regulators to then turn their focus to shorter-term fixes such as reinflating asset prices, often an effective lever for shoring up consumer confidence.

Wu Qing, chair of the China Securities Regulatory Commission, said in October regulators are weighing plans for what he called a “market stabilization fund”. In a way Huijin is already playing this role by mopping up bank shares and, more recently, exchange-traded funds, whenever Beijing wants to give stock investors a confidence boost. Taking control of CSFC ensures it will be involved should Beijing find it necessary to take broader steps to bolster market confidence. One option would be to park Huijin’s bloated portfolio of onshore equities in an exchange-traded fund, similar to the Tracker Fund Hong Kong set up with the shares it acquired during the 1998 financial crisis.

Bigger power brings bigger responsibilities. In some sense, Huijin is now the captain of a more streamlined “national team”. Its objective will be propping up confidence not just in China’s stock market, but in the entire economy. It’s a daunting mission.

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CONTEXT NEWS

Three of China’s state-owned bad-debt managers said on February 14 the country’s Ministry of Finance plans to transfer a majority stake in the companies to Central Huijin, the domestic unit of sovereign wealth fund China Investment Corp. Central Huijin will also take over control of China Securities Finance Corp, which funds securities firms for their margin trading.

The bad-debt managers China Cinda Asset Management, China Orient Asset Management and China Great Wall Asset Management were created in 1999 by the Ministry of Finance to bail out the country’s large state lenders. Meanwhile, China Securities Finance Corp led the “national team” of investors which attempted to counter the country’s 2015 stock market meltdown by channelling nearly 2 trillion yuan ($275 billion) of state capital into onshore securities.

(Editing by Peter Thal Larsen and Oliver Taslic)

((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))