(Bloomberg) — China’s finance ministry is considering a proposal to transfer its shares in China Huarong Asset Management Co. and three other bad-debt managers to a new holding company modeled after the one that owns the government’s stakes in state-run banks, according to a person familiar with the matter.Policy makers are re-examining the proposal, which was first tabled three years ago, as part of discussions on how to deal with the financial risks posed by Huarong, said the person, who asked not to be identified discussing private information.Some officials view the creation of a holding company as a step toward separating the government’s roles as a regulator and shareholder, streamlining oversight and instilling a more professional management culture at Huarong and its peers, the person said.Authorities are also discussing whether to bring in more external investors, effectively reducing the finance ministry’s controlling stakes, the person said. Regulators are still awaiting guidance from senior Chinese leaders on the proposals and on how to resolve Huarong’s debt challenges, the person added.It’s unclear what impact, if any, the proposed changes would have on Beijing’s willingness to extend financial support to Huarong and its peers during times of stress. Even though the government owns stakes in major Chinese banks indirectly through a company called Central Huijin Investment Ltd., the firms are still considered by creditors and other counterparties to enjoy strong official backing.Fears that Huarong might default have rattled bondholders since the end of March, when the company missed a deadline to report annual results. Any move to inflict losses on Huarong’s creditors would mark a significant — and potentially risky — step in President Xi Jinping’s campaign to reduce moral hazard in the world’s second-largest credit market. With nearly 1.6 trillion yuan ($251 billion) of liabilities and a vast web of connections with other financial institutions, Huarong is among China’s most systemically important companies outside the nation’s state-owned banks.While Huarong has continued to repay maturing debt on time, the company’s longer-dated obligations are trading at stressed levels. Its 4.5% perpetual bond is priced at about 60 cents on the dollar, data compiled by Bloomberg show. In the onshore market, the company’s 3.7% bond due 2022 traded at a record low 69.9 yuan on Monday.Huarong and China’s finance ministry didn’t respond to requests for comment. The company has previously said that its liquidity position is “fine” and that it has seen no change in government support.Huarong has reached funding agreements with state-owned banks to ensure it can repay debt through at least the end of August, by which time the company aims to have completed its 2020 financial statements, people familiar with the matter said last month. Huarong has also drafted a proposal that would see it offload unprofitable and non-core businesses while avoiding the need for a debt restructuring, though that plan would require approval from senior policy makers, people familiar said in April.Chinese authorities have so far been silent about Huarong’s fate in public as they work out how to manage its debt issues.China Investment Corp., the $1 trillion sovereign wealth fund and parent of Central Huijin, has objected to one proposal that would have seen it assume the finance ministry’s state in Huarong. CIC has argued it doesn’t have the bandwidth or capability to fix Huarong’s problems, people familiar with the matter said last month. The ministry itself, which owns 57% of Huarong on behalf of the Chinese government, hasn’t committed to recapitalizing the company, though it hasn’t ruled it out, either, one person said.Some officials see the Huarong saga as an opportunity to revamp how China oversees all of its bad-debt managers.The government created Huarong, China Cinda Asset Management Co., China Great Wall Asset Management Co. and China Orient Asset Management Co. during a banking crisis in the late 1990s, using the firms to carve out 1.4 trillion yuan of non-performing loans from the nation’s biggest state-run lenders.After completing their 10-year mandate as bad-debt managers, the companies expanded into everything from investment banking to trusts and real estate, borrowing billions from banks and bond investors in the process. Huarong was the most aggressive of the four under former Chairman Lai Xiaomin, who was executed in January for crimes including bribery.Together, the bad-debt managers have nearly $50 billion in outstanding dollar bonds and need to refinance or repay $4.9 billion of maturing notes through year-end, according to data compiled by Bloomberg.While Huarong has so far borne the brunt of selling by bond investors, the company’s peers have also come under pressure. The yield spread on China Cinda’s 3% note due 2031 increased 15 basis points to 238 basis points as of 3:36 p.m. in Hong Kong, widening for a fifth straight day, Bloomberg-compiled data show. The spread on China Orient’s 2.75% bond due 2030 increased 10 basis points to 226, set for the widest level since the note was issued in November.(Updates with Tuesday trading.)More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.