Fallen angel Shimao "clearer indicator" of China property woes, Chinese firms test SEC with new listings & Argentina cozies up to China, Russia -- #China Boss #News 2.14.22
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Fallen angel Shimao Group may be a “clearer indicator” than Evergrande of turmoil in China’s property market, analysts say
Fallen angel Shimao Group “could be a clearer indicator [than Evergrande] of whether turmoil in the nation's property market can be contained this year” Nikkei Asia analysts have reported.
Nikkei Asia:
The reason is that Shimao never looked like a default risk. The Hong-Kong listed company is present in over 100 cities across China with 434 projects -- big, but less than half the size of Evergrande -- and more highly regarded by credit rating agencies. It belongs to the "green camp," the term market players use for property developers that have passed the "three red lines" test introduced in 2020 by President Xi Jinping's government to rein in excessive borrowing.
"Shimao's bonds looked safe, until they didn't," Nikkei's analyst said.
China Boss discussed the plight of Shimao investors in Part 2 of the series “Is China too big to fail? Evaluating financial contagion and systemic risk in China’s current debt crisis” published last week on Harris Bricken’s China Law Blog:
Recent news that China’s 13th largest developer, Shimao Group, is also struggling sent shockwaves across the property industry. Shimao had not been designated by the PBOC or the Ministry of Housing and Urban-Rural Development – the two supervisors responsible for curbing over-leveraging in China’s real estate market – among firms in danger of crossing any of Beijing’s “three red lines” – rules that restrict new borrowings of heavily indebted developers annually. The sudden default of Shimao’s Shanghai unit on a US$101m project in early January alerted analysts to serious problems with transparency and oversight, leading some to “fear Shimao’s difficulties could be more destabilizing for the Chinese property market than the Evergrande and Kaisa crisis,” according to Aljazeera.
Aljazeera’s reporters also described “a general sense of unease over the company’s lack of visibility” that had emerged after investors learned “that homebuyers who recently purchased 96 Shimao properties in Shanghai were not able to register for the transfer of ownership titles, as the properties had already been pledged to one of Shimao’s lenders,” and that “[f]or many months, Shimao’s onshore bonds were also traded at more heavily discounted prices than their offshore bonds.” The speed of credit down ratings and a sharp plunge of “more than 50 percent” in Shimao’s share prices since November had also “caught investors off-guard.”
Alfredo Montufar-Helu, director at The Economist Intelligence Corporate Network in Beijing, also reminded investors of a fundamental challenge in understanding the financial health of Chinese property developers.
Nikkei Asia:
Shimao's default came as a surprise, said Alfredo Montufar-Helu, director at The Economist Intelligence Corporate Network in Beijing, but on closer inspection the "three red lines" policies only regulate on-balance sheet debt.
"This implies that the market might be underestimating how leveraged Chinese real estate developers really are," said Montufar-Helu. "Many of them have hidden their indebtedness using supply-chain financing, wealth-management products and [by] taking equity investment containing debtlike obligations."
…"What has happened to Shimao shows that, although the finances of Chinese developers might appear sound to investors, as per the information shown in their financial report, in reality they might be facing liquidity constraints," Montufar-Helu said.
Both S&P Global Ratings and Fitch Ratings have lowered Shimao's credit rating. S&P cautioned that the firm’s "weakening liquidity was 'worse than we previously anticipated,’" Nikkei said, and Shimao’s founder has been conducting “fire sales . . . [as] an effort not just to raise money but to raise confidence, to keep Shimao from falling into a downward spiral,” news staff noted.
The possibility that Shimao may be a more accurate bell-weather of financial contagion risks in China is not only due to its hidden debt and Beijing’s supervisory failures, but also because of the lower risk tolerances of its investors, analysts suggested.
Nikkei Asia:
While Evergrande is in the throes of restructuring, and other developers that have crossed Xi's "three red lines" are also likely to find themselves broken apart, there is more ambiguity about what will happen to those in the next tiers. These previously sound-looking businesses have attracted higher credit ratings, and consequently more conservative domestic and global investors.
Emphasis added.
For the rest of Nikkei Asia’s stellar report, China's Shimao fights to restore confidence as debt crisis spreads, click here. For my new article on Harris Bricken’s China Law Blog, Is China too big to fail? Evaluating financial contagion and systemic risk in China’s current debt crisis (Part 1), click here, and for Is China really too big to fail (Part 2), click here.
Law and International Xi
Chinese companies test regulators with new U.S. listings
A few Chinese companies “are seeking to become the first China-headquartered businesses to go public in the US since July,” the Financial Times reported. FT also said their “efforts” were “a test of regulators’ willingness to accept listings after clampdowns on both sides of the Pacific.”
Financial Times:
Although each deal is expected to be small in size, lawyers, exchange officials and China experts will be watching them closely for signs that there is still a future for the once-thriving market for Chinese listings.
…The efforts highlight the continuing appetite from companies to access the incomparably deep pools of investor capital in the US, but their success is not certain.
“It’s not guaranteed, even though you’ve filed the statement, that you’re going to be able to conduct an offering. There’s still lots of discretion for the SEC in how that process goes,” cautioned one former SEC official.
For the rest of the Financial Times report, China companies try to list in US in test for regulators after clampdown, click here.
Chinese embassy in Britain “steps up pressure” on UK over Falklands as Argentina cozies up China, Russia
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