So far, the signals are mixed. Take the housing market, where local governments have flip-flopped. Last Thursday, industrial hubs such as Qingdao and Suzhou removed restrictions on buying second-hand homes and non-residents respectively, only to roll back the next morning. These setbacks have prompted investors to conclude that President Xi Jinping’s mantra that housing should be lived in, not speculated upon, remains firmly in place. As such, August’s mini-rally of real estate developer high-yield dollar bonds quickly ran out of steam. Shanghai-based private equity giant Fosun International Ltd. and the French resort group Club Med. Its stocks and bonds have recently seen strong sales as global ratings agencies downgraded the company’s rating, citing refinancing risks.
These risks reflect investors’ concerns about interference from government authorities. Last week, Fosun’s Communist Party internal secretary visited the Beijing branch of Sasac – the State Council’s Public Assets Supervision and Administration Commission – the company said in a statement.
The powerful agency has recently witnessed selling pressures at some of its portfolio companies. In early September, a subsidiary of Fosun pledged a 7.9% stake in Beijing Sanyuan Foods Co. to a brokerage firm. Sanyuan’s main shareholder is a state-owned company directly supervised by the Beijing Sasac.
Fosun said Beijing Sasac has conducted a routine information-gathering investigation with the company, and the agency has already sent such notices to other companies. The two sides held in-depth exchanges on the long-term cooperation between Fosun and Beijing’s state-owned enterprises.
In another era, investors might have simply dismissed Fosun’s Sasac visit. But after a deadly crackdown, where little-known government agencies came out of nowhere to wipe billions of dollars off the market value of companies – think of the cybersecurity watchdog’s hawkish stance that ultimately led to the delisting of the giant Didi from New York – traders are naturally capricious.
If we use the loan-to-value ratio as a measure of financial security, at 39%, Fosun’s balance sheet is healthy for an investment holding company. However, with insufficient liquidity and access to the closed dollar bond market, Fosun must rely on bank loan refinancing and the rapid disposal of assets to meet its short-term obligations. About 53% of its debt will mature within a year, according to S&P Global Ratings. In other words, Fosun’s ability to quickly dispose of its investments is crucial.
With just 117 billion yuan ($17 billion) in debt, Fosun is nowhere near the height of indebted Chinese developers. However, the company is important because it is a key barometer of the high yield corporate bond market. Last year, when property developers collapsed – around a third of the top 100 builders defaulted or sought loan extensions – Fosun became the natural destination for investors to park their money. He has scale, cash – and until recently – a decent credit rating. Fosun has about $4 billion in dollar bonds outstanding, with its smallest issue at a respectable $450 million. It was a BB rated company.
Now, that safe haven may not be so safe. And the high-yield dollar corporate bond market cooled further.
When a company is nearing distress, credit analysts can always point the finger at one metric or another, saying its cash flow management could be better. However, even the best private companies can go awry if the government becomes overzealous or indiscreet.
In the capital markets, the Chinese government does not have the best reputation at the moment. If Beijing still wants foreign capital, it must tell its various agencies to keep a low profile and shut up. Their spontaneous visits with companies scare away investors.
More from Bloomberg Opinion:
• Private equity giants have cash flow problems: Shuli Ren
• The compromise on Chinese stock quotes is a victory for the United States: editorial
• Xi Jinping sends mixed messages to investors: Shuli Ren
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She holds the CFA charter.
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