Six months after its chair Lai Xiaomin was found guilty of corruption and executed, the fate of Huarong Asset Management, China’s biggest bad debt manager, is no clearer and the stakes for Beijing are rising.

One of four state-owned asset management companies established in 1999 to clean up the banking sector’s debts following the Asian financial crisis, the turmoil at Huarong has deepened since the death of Lai.

The failure to release its financial accounts for 2020 and uncertainty over the Rmb1.7tn ($261bn) of assets on its balance sheet has triggered wild swings in the $22bn of dollar-denominated bonds the group sold to international investors.

The prospect of $100bn of Chinese corporate debt coming due this year is injecting further urgency into resolving the future of a group that over the past decade left its roots as a staid manager of bad debts far behind.

“We don’t expect it, but if the Huarong situation results in a default, then what does that say about government support for other government-owned entities?” said Charles Chang, a director at rating agency S&P. “If it turns out that a default or restructuring occurs, we will need to take a look at all [of them]”.

Concerns over Beijing’s approach to the companies it set up to handle bad debts and distressed loans in China were amplified this month after authorities opened an investigation into Hu Xiaogang, vice-president of China Great Wall Asset Management and a former executive at China Orient Asset Management.

Great Wall and Orient, along with Cinda and Huarong, make up the quartet of bad debt managers. As with bad banks set up in Spain and Ireland following the eurozone crisis, their aim was to take on troubled loans from the banking system — a still important function in China’s financial system.

But rather than shrinking in size as memories of the Asian crisis faded, the asset managers embarked on a freewheeling expansion which saw the four raise more than $100bn from debt markets between 2013 and 2018.

All set their sights beyond China, but Huarong was by far the most aggressive. In 2015 alone, its international assets ballooned by more than 300 per cent, according to S&P. In that year, it listed part of its business in Hong Kong following strategic investments from Goldman Sachs and Warburg Pincus.

The firepower for Huarong’s overseas activity, which the company has since blamed on Lai, came in large part from the $22bn of dollar-denominated debt raised by its international arm.

“During the tenure of the former chair, Huarong expanded into many business lines unrelated to its core mandate of distressed debt management,” said Jason Tan, an analyst at CreditSights. This “ultimately led to the downfall of the chair and a reckoning for the company”.

Huarong’s overseas investments helped Chinese companies access credit beyond the mainland. One example was its 2016 purchase of dollar debt sold by China Aluminum, one of the world’s largest producers of the metal and not a financially stricken company. Chinese companies frequently issue dollar-denominated bonds via Hong Kong, outside the country’s domestic financial markets, to tap demand from international investors.

It also bought bonds sold by Country Garden, a privately owned real estate developer that has become one of China’s best-known real estate companies in a sector now under pressure from Beijing to reduce its debts. In 2017, Huarong also helped developer Zhonghong Holdings purchase a $449m stake in US amusement park operator Seaworld Entertainment.

In a period of seemingly unchecked growth which saw its assets balloon sevenfold between 2012 and 2018, Huarong established its own banking, brokerage, insurance and leasing arms, alongside a drive into property development.

Ronald Thompson, a managing director of Alvarez & Marsal Asia, said the bad debt managers morphed into “financial supermarkets” at a time when the country’s financial system was growing rapidly.

Huarong’s own expansion beyond its initial remit was fuelled in part because taking on a company’s problem debts eventually led to it taking ownership stakes in the businesses.

“Where [in] the US, we would have high yield lenders, we would have high-yield bonds, we would have private equity players, the asset management companies have partially filled that role in China,” said Thompson.

“If you’re a boss of an AMC [asset management company] and your future is to close it down next year as was originally designed,” he added, “it’s probably not good for morale.”

In a statement to the Financial Times, Huarong said that since 2018 it had “resolutely implemented policies and decisions of the CPC Central Committee, the State Council and regulatory authorities”, and that it had “refocused on its core business of distressed asset management”.

As Huarong’s dollar debts trade at distressed levels, the pressing question for investors and regulators is where the reckless growth has left the group’s balance sheet.

The company, which is headquartered in Beijing, had only half its assets in its “distressed” segment, according to its 2020 interim report released last August and the latest available data. The report refers to other assets including loans and debts to businesses within China.

Column chart of Total assets (HK$bn) showing China Huarong Asset Management

Huarong International Holdings, the arm which issued the dollar debts, had total assets of HK$198bn ($25.6bn) in the first half of 2020, down a third from 2017, according to CreditSights. They included equities, convertible bonds, structured products and over-the-counter derivatives.

Although far less glitzy, Huarong’s overseas ambitions — and their unwinding — carries echoes of HNA, Anbang and Dalian Wanda, a trio of privately owned Chinese conglomerates that were given licence to hunt for trophy assets around the world before a government crackdown in 2018.

HNA has taken years to wind down, with creditors only applying for bankruptcy in January after a court said the once high-flying group was unable to pay its debts.

While Huarong is expected to play a crucial role within the Chinese mainland, particularly if domestic credit conditions tighten further, the next move lies with Beijing.

“They are probably trying to figure out what is the hole,” said one investor in Hong Kong. “Once they’ve figured out how big is the hole, they can make a decision about whether they’d like to bridge that gap or not”.

Line chart of $1.5bn perpetual bond, 4.5 per cent coupon (% of par) showing Huarong