China’s Biggest ‘Bad Bank’ Will Get a Rescue

China has promised to teach its most indebted companies a lesson. Just not yet.

Huarong Asset Management, the financial conglomerate that was once a poster child for China’s corporate excess, said Wednesday night that it would get financial assistance from a group of state-backed companies after months of silence about its future. The company also said it had made a $16 billion loss in 2020.

Citic Group and China Cinda Asset Management were among the five state-owned firms that will make a strategic investment, Huarong said without providing more details on how much money would be invested or when the deal would be finalized.

Huarong also said that it had no plans to restructure its debt but left unanswered the question of whether foreign and Chinese bondholders would have to accept significant losses on their investments.

Investors took the news to be a strong indication that the Chinese government was not yet ready to see the failure of a company so closely tied to its financial system. For months, investors waited for any news of Huarong and its financial future after the company delayed its annual results in March and suspended the trading of its shares in April.

“It’s hugely positive,” said Michel Löwy, chief executive of SC Lowy, an investment firm that has a small position in Huarong’s U.S. dollar bonds. “It’s certainly a partial bailout because I don’t believe that totally independent investors would be subscribing to a capital raise without assurances or a tap on the shoulder,” Mr. Löwy said of the group of state-backed companies mentioned in Huarong’s statement.

For years Beijing looked the other way as companies like Huarong borrowed heavily to expand. The companies grew into huge conglomerates built largely on cheap state bank loans and money borrowed from foreign and domestic investors who believed they could count on the Chinese government to bail them out if push came to shove.

Over the past few years, however, officials have indicated a willingness to let some of these companies fail as they try to rein in the ballooning debt threatening China’s economy.

Even as Beijing cracked down on risky binge borrowing, Huarong tested the limits of China’s commitment to reform. Known as a “bad bank,” Huarong was created in the late 1990s to take the ugliest loans from state-owned banks before they turned to the global markets to raise money as China opened up. It later expanded into a sprawling empire by lending to high-risk companies, using its access to cheap loans from state-owned banks.

Over the years, Huarong became more and more intertwined with China’s financial system, leading some experts to say it was “too big to fail” and putting regulators in a difficult position. Under its former chairman, Lai Xiaomin, it engaged in suspicious deals that regulators said led to corruption so widespread that it might be impossible to assess the full extent of the losses.

Mr. Lai confessed to using his position to accept $277 million in bribes and was sentenced to death and executed in January for corruption and abuse of power.

In its statement on Wednesday night, Huarong blamed the company’s “aggressive operation and disorderly expansion” under Mr. Lai in part for its $16 billion loss.

A fresh injection of cash will give Huarong more time to sell off parts of its vast financial empire, analysts noted, though it was unclear whether the investment would be enough to stem the company’s towering losses.