(Bloomberg) – It was after 9 p.m. On Financial Street in Beijing, the figure in the Huarong Tower picked up an ink brush and began to draw characters on paper with practiced strokes. Another busy day ended for Wang Zhanfeng, chairman of the company and an official of the Chinese Communist Party – and less happy to replace a man who had recently been executed. That April night, Wang was seen relaxing in his office, as is so often the case, practicing the art of Chinese calligraphy, a form that expresses the beauty of classic characters, said the nature of the person who writes them. Mastery requires patience, determination, skill, calm – and Wang, 54, needs all of that and more. Because here on Financial Street, just a short walk from the huge headquarters of the People’s Bank of China, a dark drama is taking place behind the mirrored facade of the Huarong Tower. As it develops, China’s vast, debt-ridden financial system, the technocrats working to fix it, and the foreign banks and investors trapped in the middle will be tested. Welcome to the headquarters of China Huarong Asset Management Co., the troubled state-owned company. Bad Bank ‘that is cutting edge in the financial world. For months, Wang and others have been trying to clean up the chaos here in Huarong, an institution that is – in the truest sense of the word – at the center of China’s financial power structure. In the south is the central bank that manages the world’s second largest economy. in the southwest the Treasury, Huarong’s main shareholder; Less than 300 meters to the west, the Chinese banking and insurance regulator was concerned with securing the financial system and ensuring that Huarong had funding backing from state banks until at least August. The patch, however, does not yet complete the question of how Huarong is doing well with roughly $ 41 billion borrowed in the bond markets, most of which arose among Wang’s predecessors before he was embroiled in a major crackdown on corruption. This longtime manager, Lai Xiaomin, was killed in January – his formal presence was wiped out by Huarong until his share certificates were signed. The bigger problem is what all of this could mean for the financial system and China’s efforts, Leader Xi Jinping, to centralize control, curb years of risky credit and put the nation’s financial house in order: “You are doomed if they do , and damn it if they don’t, “said Michael Pettis, a Beijing-based professor of finance at Peking University and author of Avoiding the Fall: China’s Economic Restructuring. The Huarong bailout would heighten the behavior of investors who ignore risk, while a default puts financial stability at risk if a “chaotic” bond market revaluation occurs. What happens in the Huarong Tower? In view of the stakes, few are willing to discuss this question publicly. However, interviews with people who work there, as well as with various Chinese regulators, provide a glimpse into the eye of this storm. In short, Huarong has been in crisis mode since delaying 2020 results and is undermining investor confidence. Expect executives to be summoned by government agencies immediately if market sentiment turns sour and the price of Huarong debt drops again. Wang and his team are required to provide written information about Huarong’s business and liquidity on a weekly basis. They have turned to state banks for assistance, and have turned to bond dealers to try to calm the nerves with little sustained success. In public statements, Huarong has repeatedly insisted that his position is ultimately solid and that it will honor his commitments. Banking regulators had to sign the text of these statements – another sign of how serious the situation is and who is ultimately responsible for it. Then there is a regular audience with the Treasury Department and the other powerful financial bureaucracies nearby. Among the topics that are usually on the agenda: possible plans to spin off various Huarong companies. Huongong executives are often kept waiting and, as those familiar with the sessions say, are given limited access to top CBIRC officials, banking overseer The Apex Financial Guard – chaired by Liu He, Xi’s right-hand man in overseeing the economy and the financial system – has requested information about the situation in Huarong and coordinated meetings between regulators, according to regulators. However, no long-term solution has been communicated to officials, including whether to impose losses on bondholders. Representatives from People’s Bank of China, CBIRC, Huarong and Treasury Department did not respond to requests for comment. Focus on the basics A middle-class party official with a PhD in finance from the prestigious Southwestern University of Finance and Economics in China arrived at the Huarong Tower in early 2018 when the corruption scandal consumed the huge asset management company. He is considered low-key and down-to-earth in Huarong, especially when compared to the company’s former head, Lai, a man who was once known as the god of wealth. Hundreds of Huarong employees, from department heads in Beijing to branch employees in distant outposts, listened as Wang checked the quarterly figures on April 16. He stressed that the company’s fundamentals had improved since its acquisition, which some analysts shared, although that was not enough to reassure investors. But he had little to say about what concerns so many people: plans to restructure and shore up the huge company that he had promised to clean up within three years of his acquisition. His main message to the troops: focus on the basics, like collecting dubious assets and improving risk management. The employees were silent. Nobody asked a question. One employee described the mood in his region as “business as usual”. Another said employees at a Huarong subsidiary were concerned the company might not be able to pay their salaries. There is a growing gap between the old and new guards, said a third employee. Those who have survived Lai and whose pay has been cut year after year have little faith in the turnaround, while new carpenters have more hope of the opportunities the change of direction offers. Others joke that the Huarong Tower suffered from poor Feng Shui: after Lai was arrested, a bank that had a branch in the building had to be bailed out for $ 14 billion. Dark humor aside, a crude consensus has emerged among senior management and mid-level regulators: like other major state-owned companies, Huarong still seems too big to fail. Many have given the impression – and it is the impression – that, at least for the time being, the Chinese government will stand behind Huarong. At least these people say there is no serious financial turmoil, such as a default by Huarong, is likely to be allowed while the Chinese Communist Party plans a nationwide spectacle to celebrate the 100th anniversary of its founding on July 1st. These celebrations give Xi – who has positioned himself to remain in power indefinitely – the opportunity to consolidate his place among China’s most powerful leaders, including Mao Zedong and Deng Xiaoping. Huarong is “far from default,” wrote the managing editor of Caixin Media in an opinion piece on Saturday. Neither the Treasury Department nor the Chinese regulators would allow this, Ling Huawei wrote. What will come after this patriotic outpouring on July 1st is uncertain even for many in Huarong Tower. Liu He, China’s vice-premier and chairman of the powerful Financial Stability and Development Committee, seems in no hurry to force a difficult solution. The silence from Beijing has begun to shake local debt investors who appeared unaffected by the sale of Huarong’s offshore bonds until about a week ago, according to Dinny McMahon, economic analyst for Beijing-based consulting firm Trivium China and author of the Great Wall of Debt That cleanup is needed but requires small government intervention, ”he said. “It is intended to signal that investors should not assume that government support will lead to support from Carte Blanche.” With no direct orders from above, Huarong finds itself in the midst of the competing interests of various state-owned corporations and government bureaucracies for the time being. For example, China Investment Corp., the $ 1 trillion sovereign wealth fund, has turned down the idea of taking a majority stake from the Treasury Department. CIC officials have argued that they do not have the bandwidth or the ability to troubleshoot Huarong’s issues, according to those familiar with the matter. The People’s Bank of China is currently still trying to decide whether to proceed with a proposal that claims more than 100 billion yuan ($ 15.5 billion) in Huarong bad assets, these people said. And the Treasury Department, which owns 57% of Huarong on behalf of the Chinese government, has not committed to recapitalizing the company, although it is not ruled out either, one person said. CIC did not respond to requests for comment. Banking regulator bought Huarong for some time and signed an agreement with government lenders including Industrial & Commercial Bank of China Ltd. that would cover any funds needed to repay the converted $ 2.5 billion due by the end of August. By then, the company is aiming to finalize its 2020 financial statements after scaring investors with missed deadlines in March and April. “How China deals with Huarong will have a profound impact on the perception and trust of global investors in Chinese state-owned companies,” said Wu Qiong, a Hong Kong-based executive director at BOC International Holdings. “Should any defaults trigger a reassessment of the level of government support assumed when evaluating SOE loans, it would have a profound impact on the offshore market.” The announcement of a new addition to Wang’s team underscores the stakes and offers some insiders a measure of hope. Liang Qiang is a permanent member of the All-China Financial Youth Federation, widely regarded as a pipeline for preparing future executives for financial companies. Liang, who arrived in Huarong last week and will soon take on the role of president, has worked for the other three major state asset managers like Huarong to clean up the country’s bad debts. Some speculate that this suggests a broader plan: Huarong could be used as a blueprint for the authorities’ approach to these other sprawling, debt-ridden institutions. Meanwhile, the Huarong Tower remains a key element in the diaries of top executives and rank-and-file employees alike. It is a monthly meeting, the theme of which is vital to Huarong’s rebirth: studying the teachings of the Chinese Communist Party and the speeches of President Xi Jinping. (Updates to reflect Caixin’s opinion.) For more articles like this, visit bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg L.P.