To the rescue?

Country Garden’s HQ in Foshan

Muddy Waters, a shortseller, first came to wider attention in 2011 for asking awkward questions about accounting standards at companies like Sino Forest.

Investors were shocked when ratings agency Moody’s joined the chorus of concern about other Chinese firms, however. In a report it warned of ‘red flags’ at 61 companies, mostly from the private sector. China Evergrande was flagged seven times, for instance, on concerns ranging from weak cashflows to what Moody’s deemed as a risky business model.

Given the untypical nature of the review – which didn’t incorporate the agency’s standard ratings structure – Moody’s was reprimanded by Hong Kong’s regulator and fined $1.4 million (after a lengthy legal row) for breaching the Securities and Futures Commission’s code of conduct.

That setback did little to sully the reputations of the three leading rating firms (made up of S&P and Fitch, alongside Moody’s). Plenty of Chinese firms, including property developers cut off from local bank lending, lined up for their services, which were a prerequisite for issuing bonds to foreign investors.

More recently the Chinese property sector and the international rating agencies have taken diverging paths – in another ‘decoupling’, so to speak.

According to Jiemian, a news website, at least 70 property clients of the ‘Big Three’ have requested that their ratings be withdrawn.

The latest to ask was Country Garden, China’s biggest property firm by sales. “We subsequently withdrew our issuer credit rating on Country Garden at the company’s request. The rating outlook was negative at the time of the withdrawal,” S&P said in a statement, with Fitch making a similar announcement the following day.

What is triggering the withdrawals, Jiemian says, is a series of persistently negative ratings that have seen the property firms downgraded on more than 300 occasions since the second half of 2021.

Foreign raters tend to be overly bearish on China’s real estate industry, Jiemian reckons, especially when a key part of the equation is assessing the Chinese government’s latest thinking on the sector accurately. This was in evidence again this week. Just a few days after S&P withdrew its rating on Country Garden, the Hong Kong-listed firm’s shares surged more than 40% on Monday. The rebound was triggered by a notice jointly published by the People’s Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC), which laid out new plans to bring “stable and healthy development” to the property sector.

The government’s earlier ‘three red lines’ policy – designed to prevent debt-laden developers from borrowing more from banks and the onshore bond market – have brought some of the biggest firms to the brink of disaster financially. Shares of former giants such as Evergrande and Sunac have been suspended from trading since April.

But as part of the 16-point plan announced by the PBoC and CBIRC, payments on outstanding bank loans and trust borrowing due within the next six months can be extended for a year. There is also more room for bond repayments to be extended or renegotiated, Bloomberg reported.

Developers classified as in verifiably better financial health will also be allowed to access as much as 30% of the capital from presold properties where the funds are held (as a guarantee to purchasers) by banks.

Many see the policy combo as ‘a rescue plan’ for the ailing property sector. The plan was also published on the same day that the National Health Commission issued a 20-point notice “optimising” the country’s zero-Covid policy, which looks to be aimed at reducing the economic and social disruption of what has been a draconian approach.

Taken together, the two announcements have the potential to ease two of the biggest headwinds checking growth in the Chinese economy, Bloomberg reported. Business bosses in the internet sector – the subject of various antitrust and data security crackdowns for the last two years – will be hoping they might soon get some relief as well, as policymakers look for other ways to boost a slowing economy.

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