Log Log * ACC | Cas S SOL S Qui [Sol * / Con http X Bb 230 Rev . Nur | Hor & ACC G finn S FINI + V X C D services.hosp.harvard.edu/Iti/links/content-launch Update M Gmail Obsn YouTube OneLook Dictionary... @ Grammarly Paraphrasing Tool |... W citationmachine converter E China Huarong: Was it a Risky Business? 1 / 21 - 100% + ... RAM CHINA HUARONG: WAS IT A RISKY BUSINESS? China Huarong Asset Management Co., Lid. (+ 4+WHIZ ]), also known as China Huarong ( 1414) (Huarong or "the company"), was a majority state-owned financial asset management company (AMC) in China, with a focus on distressed asset management. It was the largest of the four AMCs that the Chinese government established in 1999. These AMCs were founded to take on the bad loans at face value of four large state-owned banks before these banks were listed.' Huarong took on the bad loans of the largest Chinese bank, Industrial and Commercial Bank of China (ICBC)." On 30 June 2020, Huarong had around CNY1.7tn in total assets. 34 In 1999 and 2000, the AMCs issued 10-year bonds and other securities that were backed by the state to finance the bad loans. Instead of selling the bad loans and winding down their businesses after the bonds matured, the AMCs evolved into financial conglomerates and further expanded until 2018." They were engaged in "securities broking, insurance, trusts, property development, private equity investments and financial leasing." As state-owned distressed asset managers, the AMCs stepped in to assist Chinese companies that were at risk.' According to the Financial Times, sometimes the activities of AMCs were under the influence of the state. Huarong (SEHK:2799) was listed on the Hong Kong Stock Exchange (SEHK) main board in 2 October 2015. It missed the deadline for its 2020 annual report filing to the SEHK at the end of March 2021, and its shares were suspended from trading after 1 April 2021. On 31 March 2021, "Ex-chairman of China's Huarong Asset Management sentenced to death," Financial Times, 5 January 2021, https:/www.ft.com/content/c26173c6-2676-40a6-8007-52d89fobfe36, accessed 23 May 2021. 2"Breaking SFC freezes up to HK$10.17bn of assets in 3 brokers," webb-site. com, I October 2018, https://webb- site.com/articles/yangfreeze.asp, accessed 27 April 2021. 3 Huarong, June 2020 Interim Report, p.8, https:/www.hkexnews.hk/listedco/listconews/schk/2020/0928/2020092800647.pdf, accessed 1 1 June 2021. Exchange rate USD/CNY at 1: 6.46 on 30 June 2021. "Ex-chairman of China's Huarong Asset Management sentenced to death," Financial Times. 6 "China finance: why "accidental banks' face a crackdown" Financial Times, 1 1 October 2018, 3 https:/www.ft.com/content/59da5982-c7e5-1 1e8-ba8f-ce39005768c9, accessed 23 May 2021. EM 25'C Mostly sunny ~ 9 0 64) ENG 3:41 PM 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol $ Con http X Bb 230 Rev N. 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Paraphrasing Tool |.. citationmachine converter E China Huarong: Was it a Risky Business? 7 / 21 - 82% + Interests associates and Cash & Cash joint ventures Equivalents Assets Liabilitie Shareholder's Equity 2bn (2)bn 0 Under the equity method, Huarong recorded the profit or loss of the investee company in the proportion of shareholding held at period end, together with the dividend received, in the account named "share of results of associates and joint ventures" [see Exhibit 3] Cash & Cash Other Dividend Other Shareholder's Equivalents Assets Liabilities Income Equity 100m 100m 5 Cash & Cash Share of results of associates Other Shareholder's Equivalents Liabilities and joint ventures Equity 300m 300m Risks in Huarong's Management Leveraged Business Huarong's "equity attributable to equity holders of the Company/total assets" ratio was around 7.0% from 31 December 2017 to 30 June 2020 [see Exhibit 4]. In June 2020, the PBOC set a minimum capital reserve ratio of 9.4% for Chinese banks." Huarong was operating at a higher gearing than traditional Chinese banks. Some of the borrowers were borrowing onshore or offshore from the four AMCs because their companies could not access traditional bank loans." In addition, Huarong disguised some of the loans and structured them as investments to avoid credit controls. According to the Financial Times, it helped the investee companies to bypass credit-quality checks that banks required. 67 Colluded Investment with a Listed Company Acquisition of a Subsidiary from a Regional Casino Developer In October 2018, David Webb, as a minority shareholder advocate in Hong Kong, published three reports covering Huarong and Lai's case on his website." Under the influence of Lai, 6 Huarong, 2019 Annual Report, p. 193. " Huarong. 2019 Annual Report, p. 186. 4 China Reserve Requirement Ratio, CEIC Data, h accessed 15 June 2021. Don Weinland and Hudson Lockett, "China companies tumble on report revealing Huarong cross holdings," Financial Times, 7 19 October 2018, htips://www.fit.com/coment/ca5 laceR-d35c-1 1 8.a912-7574dbfifibeds. accessed 27 April 2021. Weinland and Lockett. "China companies tumble on report revealing Huarong cross holdings." 25"C Mostly sunny ~ 9 0 6() ENG 3:45 PM 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol $ Con http X Bb 230 Rev N. Nur |Hor & ACC G finn S FINI + V X CD services.hosp.harvard.edu/Iti/links/content-launch Q Update M Gmail @ @ bsn YouTube OneLook Dictionary... Grammarly Paraphrasing Tool |... citationmachine . converter E China Huarong: Was it a Risky Business? 8 / 21 - 82% + 20/654C China Huarong: Was It a Risky Business? Huarong acquired a subsidiary from a listed company, Landing International (Landing) (SEHK: 582). a regional casino developer. " Yang Zhihui was the chair of Landing. According to Webb's report, after a series of suspected fraudulent acquisitions and disposals conducted by Lai and Yang, it was estimated that Huarong had suffered losses of approximately HKD10.17bn." These listed companies did not disclose the acquisitions and disposals to the public. According to the Listing Rules set by the SEHK, acquisitions and disposal of assets or subsidiaries were notifiable transactions to the SEHK and the public if the amounts involved met the set threshold." [See Exhibit 6 for notifiable transactions.] Due to the size of Huarong's business, until October 2018 its transactions with Landing and previous acquisitions with other parties did not meet the threshold of a notifiable transaction. " After the last of the three Webb reports was released on 18 October 2018, over 15 Hong Kong-listed companies' shares fell because they were related to Huarong." Arrest of Huarong's Senior Management In April 2018, shortly after Lai's arrest, CCDI announced Lai was being investigated for "legal violations," a common term that CCDI used for corruption." The company had yet to announce the details of the investigation of Lai and the impact on Huarong. In October 2018, Caixin, a leading Chinese financial magazine, reported around CNY261.5m in cash was recovered from Lai's homes. " Caixin also reported that around "100 properties developed by a Huarong subsidiary in southern China were distributed to Lai's ex-wife and mistresses." In January 2021, Lai was convicted of a number of crimes, including accepting bribes of around CNY 1.8bn over a 10-year period." Due to the large amount he obtained through corruption, which "caused serious losses to the interests of the country," he received the death penalty, which was unusual 7 for financial crimes in China." On 27 November 2018, Huarong announced the resignation of one of its executive director/vice presidents, a vice president, and an assistant to the president." In the announcement, each of their reasons was due to a change in job arrangement. In January 2019, Chinese prosecutors ordered the arrest of the three executives and one former executive for suspected bribery." Value of Huarong Fluctuation in Share Price from 2015 to 2021 When Huarong was listed in October 2015, its IPO share price was HKD3.1."Between October 2015 and March 2021, its share price was at its peak of HKD3.97 on 21 January 2018 and its lowest, HKDO.78, on 21 June 2020."[See Exhibit 1.] On 8 April 2018, after the news 8 3:46 PM 25'C Mostly sunny ~ 9 0 6 () ENG 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol $ Con http X Bb 230 Rev N. Nur | Hor | ACC G finn S FINI + V X services.hosp.harvard.edu/Iti/links/content-launch Q E Update M Gmail @ @ bsn YouTube OneLook Dictionary... Grammarly NuiS : ERE... Paraphrasing Tool |... citationmachine . converter mp3= =#-2:3... China Huarong: Was it a Risky Business? 9 / 21| - 82% + about Lai's investigation was released, its share price fell from HKD3.3 on 8 April 2018 to HKD1.42 on 9 September 2018." Based on Huarong's share price of HKD1.02 on its last trading date on 31 March 2021, the price/earnings ratio was 25.6 and dividend yield was 1.19% Delay in Filing Annual Report Missed Annual Report Filing on 31 March 2021 When Huarong missed its annual report filing at the end of March 2021, it announced on 31 March 2021 that it was pending, awaiting the completion of a transaction, and its auditor, Ernst & Young, required more time to finish the audit report." The company did not provide specific reasons or details for its explanation, and the market speculated the company was facing a loss and insolvency problems. " Huarong's explanation also raised concerns about Lai's former business activities and the quality of the assets Huarong held." The company was not the only listed company that missed the 31 March 2021 filing deadline at the SEHK; there were a total of 50 companies, of which Huarong was the largest." Some of the companies requested more time to complete their annual reports due to merger and acquisition activities during the pandemic. Rating Downgrades In April 2021, Huarong owed about USD22bn of USD-denominated debt." In early April 2021, the bond price of Huarong's US bond (maturing in September 2030) tumbled [see Exhibit 7]." On 15 April 2021, the Chinese rating group China Chengxin Credit said in a statement that it changed Huarong's credit outlook to "negative" due to concerns over its declining profitability and its high debt levels, but retained a triple A rating for the company." After Huarong confirmed that it would miss a second annual report deadline falling on 30 April 2021, Fitch Ratings downgraded Huarong's issuer rating from A to triple B, its lowest investment grade 8 category." On 29 April 2021, Moody's indicated that even though Huarong managed to repay a SGD600m offshore debt, the company was still facing substantial credit and market risks. Moody's also downgraded Huarong's rating as an issuer from A3 to Baal and its company rating, BCA, from bl to b2.93 Doubts Raised About Huarong By the end of April 2021, other Chinese banks provided loans to Huarong as advised by the Chinese government, and Huarong was able to extend some of the loans due. Chinese regulators said they had plans to restructure Huarong, but they did not take concrete actions." As a result, investors had doubts about government support for Huarong and for other state-owned Chinese "Huarong Stock Quote, Yahoo finance. # Huarong Stock Quote, HKEx.com, https:/www.hkex.com.hk/Market-Data/ ces Equities Equities. Quote sym 2799&sc lang en, accessed 15 June 2021. 9 Huarong Announcement, 31 March 2021, HKEx.com, 25"C Mostly sunny ~ 906() ENG 3:46 PM 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol $ Con http X Bb 230 Rev . Nur | Hor & ACC G finn S FINI + V X C D services.hosp.harvard.edu/Iti/links/content-launch Update M Gmail Obsn YouTube OneLook Dictionary... Grammarly AMiS : BRE... Paraphrasing Tool |... citationmachine converter China Huarong: Was it a Risky Business? 2 / 21 100% + ... its shares were traded at a third of the IPO price, at HKD1.02, with a market capitalization of HKD25.54bn."[See Exhibit 1 for Huarong's share prices.] A major concern the investors had about the company was a direct result of the execution of its former chair, Lai Xiaomin, in January 2021 for financial crimes involving the abuse of power to allocate credit through Huarong. " In April 2021, offshore US dollar bonds issued by Huarong plunged in value, and credit agencies downgraded the company's ratings as an issuer and as a company. " There was also pressure on Huarong for the repayment of around CNY 143bn in Chinese corporate debt due at the end of 2021." According to Reuters on 16 April 2021, in order to reduce the risk of the market tumbling and to assist Huarong's cash flow, Chinese regulators asked "some Chinese banks not to withhold loans to Huarong," in order to stabilize the banking industry." The regulators claimed Huarong's operations were normal, and it would be able to repay debts. In addition, the regulators suggested Huarong had the option of restructuring. " What should be done to restore the value of the company? Huarong On 1 November 1999, Huarong was founded as an AMC and a state-owned enterprise (SOE). 16 It was majority owned by the Ministry of Finance (MOF) of the People's Republic of China. 1718 Geographically its businesses covered 30 provinces, autonomous regions, and municipalities onshore in mainland China, and in Hong Kong and Macau as offshore cities, and overseas 2 branches as well." Huarong's vision was to "adhere to the national orientation of financial asset management companies, focus on the main business of distressed asset management, strive to serve the real economy, prevent and control financial risks and deepen reform and transformation."2 As a financial group, Huarong's business in mainland China was mainly regulated by the China Banking and Insurance Regulatory Commission in banking and insurance and the China Securities Regulatory Commission in securities; the People's Bank of China (PBOC) formulated and carried out monetary policy and regulation of financial institutions.. The company was headquartered in Beijing. On 30 June 2020, Huarong had around 10,700 of staff working in mainland China and its branches offshore and overseas.?! Huarong was infamous due to Lai, Huarong's former chair and executive director from 2012 to April 2018. The Chinese government's Central Commission for Discipline Inspection (CCDI) 3 EM 25.C Mostly sunny ~ D ( 0 6 () ENG 3:42 PM 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol $ Con http X Bb 230 Rev N. Nur | Hor | ACC G finn S FINI + V X C D services.hosp.harvard.edu/Iti/links/content-launch Q E Update M Gmail Obsn YouTube % OneLook Dictionary... @ Grammarly Atijg : BRE... Paraphrasing Tool |... citationmachine . converter China Huarong: Was it a Risky Business? 3 / 21 - 88% + started to investigate Lai in April 2018." In January 2021, he received a death sentence for accepting bribes, corruption, bigamy, and other crimes."The bribery amount was around CNY1.8bn. He was executed in the same month. In September 2018, Wang Zhanfeng had joined Huarong as chair and executive director." Including Wang, all seven senior executives of the company were members of the Chinese Communist Party." After the arrests of four senior executives in 2018 and 2019, only one of senior executives remained in office in June 2021. 36 On 30 June 2020, the MOF and its affiliates were holding around 61.41% of Huarong's outstanding shares." Other institutional investors included the National Council for Social Security Fund, China Life Insurance (Group) Company, and Warburg Pincus & Co." The AMCs The purpose of the MOF in setting up the AMCs was "for mitigating financial risks, promoting the reform of state-owned banks, and the reform and difficulty relief of state-owned enterprises.">In 1999, the other three AMCs established by the MOF were China Great Wall Asset Management Co., Lid. (Great Wall), China Orient Asset Management Co., Lid. (China Orient), and China Cinda Asset Management Co., Ltd. (Cinda)." Cinda (SEHK:1359) was listed on the SEHK in 2013, whereas China Orient and Great Wall were not listed by then." From 1999 to 2001, the four AMCs took on about CNY 1.4tn in bad debt from the four state- owned banks."Huarong absorbed about CNY408bn of bad debt from ICBC."The market value of the bad debt was a fraction of the face value transferred to the AMCs, according to the Financial Times," so the state-owned banks could maintain their profitability to prepare for listing. The 10-year bonds issued by AMCs to finance the bad debts matured from 2009 to 201 1. 2 The plan was to sell the bad debts when the market recovered before the bonds matured, at a higher price to reduce loss. In 2009, some expected the AMCs would default on the loan payments and be liquidated.35 But they did not follow the original plan, and other Chinese state- owned banks were instructed to support the AMCs using government funding. 36 Prior to April 2018, Huarong was competing with other traditional banks providing loans mainly to Chinese companies, and it outgrew the other three AMCs." In December 2020, a fifth AMC was formed, China Galaxy Asset Management Co., Lid., serving the same purposes as the other AMCs."In June 2021, the CCDI started to investigate Hu Xiaogang, a vice president of Great Wall and formerly an executive of China Orient.9 12 "Breaking SFC freezes up to HK$10.17hm of assets in 3 brokers," webb-site.com, 1 October 2018. "Huarong Debacle Highlights Problems at Hundreds of Chinese Banks," Bloomberg.com. 3 24 Huarong website, http:/www.char .com. en/en/AboutUs/Leadership/index.shtml, accessed 12 June 2021. 3:42 PM 25*C Mostly sunny ~ 9 0 () ENG 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol * / Con http X Bb 230 Rev N. Nur |Hor & ACC G finn S FINI + V X services.hosp.harvard.edu/Iti/links/content-launch Q E Update M Gmail Obsn YouTube % OneLook Dictionary... @ Grammarly AMiS : BRE... Paraphrasing Tool |.. citationmachine converter E China Huarong: Was it a Risky Business? 4 / 21 88% + Huarong's Business Financial Business Under Lai's leadership, Huarong not only acted as a distressed asset manager, but also developed its own banking, brokerage, insurance, and leasing services, as well as other businesses including property development. It also helped its clients to raise funds in the form of investments. The company issued bonds, securities, and other financial instruments to raise funds from offshore companies. Huarong provided commercial and personal loans to clients through its financial businesses. The majority of Huarong's banking clients were mainland Chinese companies. Prior to 2018, the four AMCs used their credentials as state-owned banks to issue US dollar-denominated debt, such as USD offshore bonds at interest rates of about 2 4%." They used that capital to purchase high-yield bonds or offered loans with interest rates as high as 20% to Chinese companies that were unable to access offshore loans." Main Sources of Revenue The company had three business segments for reporting purposes that covered all regions and businesses [see Exhibit 2]." (1) Huarong's major business segment was distressed asset management; it mainly included "distressed asset management acquisition and disposal, distressed asset-based investment business, and distressed asset-based property development business that was conducted by the company's subsidiaries." "(2) The financial services segment included "securities and futures business, financial leasing business, banking services business and consumer finance business."" (3) The asset management and investment segment accounted for the company's noncore businesses in trust, private equity, international business, and other businesses such as property development.* 3 For the Huarong segments' financial results, in FY2018, Huarong's revenue deriving from distressed asset management was CNY64.8bn; it fell by CNY4. Ibn year-on-year [see Exhibit 2]. In FY2019, revenue was CNY69.8bn, which was slightly higher than CNY68.9bn in FY2017. In the first six months of 2020, distressed asset management remained Huarong's largest source of revenue." Between FY2018 and the first six months of FY2020, due to a loss in the asset management and investment segment, the company gradually downsized this segment's business.474 Huarong's Financial Summary and Accounting Principles Used Financial Summary Profit and Loss Huarona's income from the distressed asset management business was called "Income from 3:43 PM 25'C Mostly sunny ~ DA0 6() ENG 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol $ Con http X Bb 230 Rev N. Nur | Har | ACC G finn S FINI + V X services.hosp.harvard.edu/Iti/links/content-launch Q E Update M Gmail Obsn YouTube % OneLook Dictionary... @ Grammarly AMiS : HE... Paraphrasing Tool |.. citationmachine . converter E China Huarong: Was it a Risky Business? 4 / 21 - 88% + Huarong's Financial Summary and Accounting Principles Used Financial Summary Profit and Loss Huarong's income from the distressed asset management business was called "Income from distressed debt assets." The second largest source of income was from "Interest Income." Since 1 January 2018, Huarong made impairment on its financial assets and other assets held, in accordance with the accounting standards of the International Financial Reporting Standards 40 "China finance: why "accidental banks" face a crackdown," Financial Times. "China finance: why "accidental banks' face a crackdown," Financial Times. 2 4 Huarong, June 2020 Interim Report, p. 25. 43 Huarong, 2019 Annual Report, pp. 55-65. "Huarong, 2019 Annual Report, pp. 67-71. Huarong, 2019 Annual Report, pp. 71-73. to Huarong, June 2020 Interim Report, p. 26. "Huarong, June 2020 Interim Report, p. 26. 45 Huarong, 2019 Annual Report, p. 54. This document is authorized for use only by Min Yu Yap in [FINM3404] Banking & - Lending Decisions (St Lucia & external) Semester 1, 2023 at UQ Business School (BB Saas), 2023. 3 20/654C China Huarong: Was It a Risky Business? (IFRS), IFRS 9 Financial Instruments that took effect the same day."Under the "expected credit loss" model of IFRS 9, Huarong's FY2018 results included "impairment losses on financial assets" and "impairment losses on other assets" totaling CNY20.Ibn, an increase of CNY2.6bn from FY2017." [See Exhibit 3 for Consolidated Statement of Profit or Loss.] In FY2018, the company's profit for the year was significantly lower, CNY1.5bn, as compared to CNY26.6bn the year before. In FY2019, the company's profit was CNY2.3bn, and it could not regain profit at the same level of CNY26.6bn in FY2017. [See Table 1.] 3:43 PM @ 25'C Mostly sunny ~ 9 0 6() ENG 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol * Con http X Bb 230 Rev N. Nur | Hor & ACC G finn S FINI + V X CD services.hosp.harvard.edu/Iti/links/content-launch Q E Update M Gmail Obsn YouTube OneLook Dictionary... @ Grammarly And : BRE... Paraphrasing Tool |... citationmachine . converter E China Huarong: Was it a Risky Business? 5 / 21 - 88% + (IFRS), IFRS 9 Financial Instruments that took effect the same day." Under the "expected credit loss" model of IFRS 9, Huarong's FY2018 results included "impairment losses on financial assets" and "impairment losses on other assets" totaling CNY20.1bn, an increase of CNY2.6bn from FY2017." [See Exhibit 3 for Consolidated Statement of Profit or Loss.] In FY2018, the company's profit for the year was significantly lower, CNY1.5bn, as compared to CNY26.6bn the year before. In FY2019, the company's profit was CNY2.3bn, and it could not regain profit at the same level of CNY26.6bn in FY2017. [See Table 1.] Table 1: Huarong Profit and Loss Summary 31 31 3 December December December 30 June 30 June 2017 2018 2019 2019 202( (CNY in millions) 12 months 12 months 12 months 6 months 6 months (Unaudited) (Unaudited) Total income 128,071 107,253 112,657 56,810 45.688 Operating profit 43.479 6,458 10.589 5.645 4,633 Profit for the year/period 26,588 1.509 2.270 2,812 792 Source: Huarong 2018 and 2019 Annual Reports, and 2020 Interim Report.52 Balance Sheet and Cash Flow From 2012 to 2018, Huarong's total assets expanded sevenfold to CNY1.7tn in value and remained flat on 31 December 2018, 31 December 2019, and 30 June 2020. [See Exhibit 4.]s Its total liabilities ranged from CNY1.54tn to 1.56tn in the same period. Therefore, its "liabilities to total asset ratio" (total liabilities/total assets) was in the range of 90.1% to 90.4%. [See Exhibit 4.] On 30 June 2020, the company's unaudited "cash, cash equivalents, and restricted cash" was CNY 140.3bn and decreased by CNY 18.9bn compared with 31 December 2019. [See Exhibit 5.] Accounting Standards Used for Huarong's Loans to Clients Huarong's financial statements for the SEHK were presented under the IFRS." The IFRS were the standards and interpretations approved by the International Accounting Standards Board. Deloitte Touche Tohmatsu audited Huarong's FY2019 annual report. There was a change in 5 auditor in 2020; Ernst & Young reviewed its June 2020 interim report.$5 WA 25'C Mostly sunny ~ 90 6() ENG 3:43 PM 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol * Con http X Bb 230 Rev N. Nur | Har & ACC G finn S FINI + V X CD services.hosp.harvard.edu/Iti/links/content-launch Q E Update M Gmail @ @ bsn YouTube OneLook Dictionary... Grammarly NUR : ERE... Paraphrasing Tool |... citationmachine . converter mp3= =#-EX... E China Huarong: Was it a Risky Business? 6 / 21 - 82% + Huarong used two methods to provide funding for corporate clients. The company granted loans to clients as a financial institution, and it also provided funds as an investment in its clients' companies. " Huarong. 2019 Annual Report, p. 34. IFRS 9, Financial Instruments, HKICPA, January 2021, https:/www.hkicpa.org.hk/HKFRS-9.Financial-Instruments, accessed 23 May 2021. Huarong. 2019 Annual Report, p. 34. Huarong. 2018 Annual Report, https:/wwwl.hkexnews.hk/listedco/listconews/schk/201910423/lin201904231349.pdf, accessed 12 June 2021. " Hale and White, "Pressure builds to resolve fate of Chinese bad debt manager Huarong." 34 Huarong. 2019 Annual Report, p. 10. $5 Huarong Announcement, 31 December 2019, https:/www.hkexnews hk/listedon/listconews/schk/2019/1231/2019123 101 180.pdf. accessed 3 August 2021. 5 This document is authorized for use only by Min Yu Yap in (FINM3404] Banking & - Lending Decisions (S: Lucia & external). Semester 1, 2023 at UQ Business School (BB Saas), 2023. 20/654C China Huarong: Was It a Risky Business? Method 1 6 Loan to Clients The accounting formula at the initiation of the loan of CNY 100mn was: Loans and advances to Cash & Cash Other Liabilities Other Shareholder's customers Equivalents Assets Equity 100m (100)m 0 Interest income of CNY2m was recorded at each period end as: Interest Receivables Other Assets Liabilities Interest Income Other Shareholder's Equity 2m 2m 0 7 At the end of a financial period, the value of the loans and financial instruments held by Huarone was measured at fair value in accordance with the accounting standards of IFRS 9 6 OF meowa 3:44 PM 25.C Mostly sunny ~ 9 0 6() ENG 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol * Con http X Bb 230 Rev N. Nur |Hor & ACC G finn S FINI + V X CD services.hosp.harvard.edu/Iti/links/content-launch Q E Update M Gmail @ @ bsn YouTube OneLook Dictionary... Grammarly AMA : BRE... Paraphrasing Tool |... citationmachine . converter E China Huarong: Was it a Risky Business? 6 / 21 82% + Method 1 Loan to Clients The accounting formula at the initiation of the loan of CNY 100mn was: Loans and advances to Cash & Cash Other Equivalents Asset Liabilities Other Shareholder's customers Equity 100m (100)m 0 Interest income of CNY2m was recorded at each period end as: Interest Receivable Other Assets Liabilities Interest Income Other Shareholder's Equity 5 2m 2m 0 At the end of a financial period, the value of the loans and financial instruments held by Huarong was measured at fair value, in accordance with the accounting standards of IFRS 9. In the case where the loans were disposed, sold as loan securities, or by other means, the company recognized the difference as gains or losses on disposals. Method 2 Investment in Companies When an investor invested in a company, the equity method in accounting was first used to estimate the appropriate accounting treatment for the investor." According to International Accounting Standard (IAS), "LAS 28 (Investments in Associates and Joint Ventures) requires an investor to account for its investment in associates using the equity method. IFRS 1 1 requires an investor to account for its investments in joint ventures using the equity method."s 6 The percentage of shares the investor held was first used as a guideline to determine which accounting method to use: (i) less than 20% shareholding - cost method, (ii) 20% to 50% shareholding - equity method, and (iii) over 50% shareholding - consolidation method. If the investor holding less than 20% of shares asserted significant control, the equity method would apply despite the percentage held. If an investor held 20% to 50% of shares and exercised significant control over the investee, the consolidation method would apply. When an investor did not exercise full control or had significant influence over the investee, it recorded its investment using the cost method. " Huarong recorded its investments according to the accounting standards, based on whether the company exercised significant influence over the investee companies as the most important criteria." Accounting formula at acquisition of investee of CNY2bn: 7 (i) Cost method - at acquisition OF meowa 25"C Mostly sunny ~ DOG() ENG 3:45 PM 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol * Con http X Bb 230 Rev N. Nur | Har | ACC G finn S FINI + V X CD services.hosp.harvard.edu/Iti/links/content-launch Q E Update M Gmail @ @ bsn YouTube OneLook Dictionary... Grammarly NuiS : ERE... Paraphrasing Tool |.. citationmachine . converter E China Huarong: Was it a Risky Business? 6 / 21| - 82% + Accounting formula at acquisition of investee of CNY2bn: (i) Cost method - at acquisition Equity instruments Cash & Cash Other Liabilities Shareholder's FVTOCI Equivalents Assets Equity 2bn (2)bn 0 0 " Huarong, 2019 Annual Report, p. 13. 37 "Equity Method," investopedia com, hitips://www.investopedia.com umethod asp, accessed 14 June 2021. "5 "LAS 28 Investments in Associates and Joint Ventures," ifirs.org, https://www.ifrs. org/issued-standards/list-of-standards/ins.28. investments-in-associates-an accessed 14 June 2021. 5 "Equity Method," investopedia.com. " Huarong. 2019 Annual Report, p. 185 Huarong, 2019 Annual Report, p. 193. This document is authorized for use only by Min Yu Yap in (FINM3404] Banking & - Lending Decisions (S: Lucia & external). Semester 1, 2023 at UQ Business School (BB Saas), 2023. 20/654C China Huarong: Was It a Risky Business? 6 Under the cost method, if the investee company distributed a dividend, Huarong recorded it as "dividend income." Cash & Cash Other Dividend Equivalents Assets Liabilities Other Shareholder's Income Equity 400m 0 100m 0 (ii) Equity method - at acquisition Interests associates and Cash & Cash Other Shareholder's joint ventures Equivalents Assets Liabilitie Equity 2bn (2)bn 7 OF meowa 25.C Mostly sunny ~ 9 0 6() ENG 3:45 PM 23/04/2023Log Log * ACC | Cas S SOL S Qui [Sol| | Con http| Chir Bb X Rev . Nur | Hor & ACC G finn S FINI + V X C D learn-ap-southeast-2-prod-fleet01-xythos.content.blackboardcdn.com/5fd17f67f4120/23009794?X-Blackboard-$3-Bucket=learn-ap-southeast-... [ Update M Gmail Obsn YouTube % OneLook Dictionary... @ Grammarly y #804 7 AMAR BRE.. Paraphrasing Tool |... citationmachine . converter mp3= =#-E:... 23009794 1 / 3 100% + ... As a starting point, carefully read "China Huarong: Was it a risky business?" (see URL on Blackboard under "Assessment") and please make sure you also read other publications from academic journals, news articles/working papers that will strengthen your assignment. Use this case as a background to carefully develop your answers to the two questions listed below: 1. Huarong and the other AMCs were created with the purpose of stabilizing the Chinese banking industry. In 2021, other banks were instructed to loan more funds to Huarong to take on its financial risks. Was the role of the AMCs doomed to fail from the start? [30 marks] 2. Huarong's lack of corporate governance during Lai's leadership and its leveraged business highlighted the problems of the other three state-owned AMCs formed in 2 Alex Woods (12345678) 1999 and the Chinese banking industry. How can the Chinese banking industry achieve stability in the long term? Discuss from an incentive mechanism design (remuneration policy) and a corporate governance perspective. [30 marks] OF meowa 25.C Mostly sunny ~ 9 0 6 () ENG 3:40 PM 23/04/2023