Government-backed investors will recapitalise China Huarong Asset Management after the bad debt manager posted a record USD15.9b loss, ending months of speculation over whether Beijing would deem the troubled financial giant too big to fail.

The rescue package unveiled on Wednesday (18 August), while thin on official details, suggests President Xi Jinping’s government is for now unwilling to allow a default by one of China’s most systemically important state-owned companies. It is likely to boost short-term confidence in China’s USD12t credit market, even as it raises concerns about the longer-term dangers of a financial system where implicit government guarantees have enabled years of reckless borrowing.

State-owned investors including Citic Group, China Insurance Investment, and China Life Asset Management will replenish Huarong’s capital, the nation’s biggest bad loan manager said in an exchange filing Wednesday. Huarong said it has no plan to restructure its debt, reiterating that it has made preparations for future bond payments.

The statement confirmed a Bloomberg report that Huarong was poised to receive fresh capital as part of an overhaul plan, according to people familiar with the matter, who put the amount being discussed at about CNY50b (USD7.7b). Control of the company would shift to Citic, the people had said, though details were still being finalised and could change.

The overhaul marks the government’s first major attempt to resolve a crisis at Huarong that has roiled the world’s second largest credit market since April. The financial giant’s plight has become the biggest test in decades of Chinese authorities’ willingness to support troubled state-owned borrowers amid a record wave of defaults.

Concerns have been swirling among investors over Huarong’s financial health and the lack of clarity on government support after the company delayed its earnings release. In separate exchange filings on Wednesday, Huarong reported a preliminary 2020 loss of CNY102.9b and said the board will approve the results for last year as well as interim 2021 results on 28 August.

Huarong’s dollar bonds rose to multi-month highs after Bloomberg’s report on Wednesday, with the 4.5% perpetual note climbing 4.4 cents on the dollar to 90.5 cents. That is up from a low of 50 cents in May.