Huarong Issues Hint at Deeper Issues for the Credit Rating Agencies and their New Chinese Adventure


In today’s short post, the developing problems with Huarong – a state-backed asset manager that is one of China’s largest offshore issuers – are revealing some engrained issues within the credit rating industry that may provide insight into the future of the Big Three’s relationship with China as it continues to open its doors to the international rating agencies.

 

The company has missed a number of financial disclosure deadlines and, according to the Financial Times, is in the middle of a massive sell-off, which started a few weeks ago. However, it is only over the past few days that the rating agencies have begun to take action, which is leading some to declare that there are similarities between this and the agencies’ actions regarding the collapse of Lehman Brothers. Whilst some negative credit watches have been established, it is Fitch who have broken rank and downgraded the company, from A to BBB. The company itself is in disarray, with it declaring that it will miss an April deadline to report its financials, as well its chairman Lai Xiaomin being executed in January for crimes that included bigamy and the abuse of power to allocate credit. Bloomberg asks how the rating agencies have gotten it so wrong again, and there is a particular reason for this.

 

In providing context for its downgrade, Fitch declared that it ‘believes the government sponsor’s indication of support has not been forthcoming’, which all three agencies have relied on given that, as of last June, the company was 57% owned by the Ministry of Finance. As the company was set up in 1999 to help banks dispose of their distressed assets, Moody’s believed that they would be enjoying a ‘very high level’ of government support, and therefore provided it with some its highest ratings. Moody’s even declared in a report published last year that a stand-alone credit analysis on these companies i.e. not taking into account governmental support, is ‘either irrelevant or misleading’. However, this hints at a much larger problem.

 

The Chinese environment is a controlled environment, and the international agencies will never be in a position to understand the rationale and direction of the controlling communist party; the agencies are placed within a reactionary position, in that sense. So, rating very highly on the premise of governmental intervention is both particularly short-sighted and also favours state-owned enterprises in a slightly imbalanced way. When it comes to firms that issue offshore bonds, the international investor ought to consider this dynamic much more than they are doing. The credit rating agencies are not in a position to know the directing mindset behind governmental intervention, and they are also, arguably, in a conflicted position whereby providing support to state-owned enterprises keeps the government onside in what is an incredibly lucrative endeavour for the for-profit rating agencies. The Chinese realm is the new goldrush for the agencies, and this needs to be remembered at all times as well. If one applies just an ounce of cynicism, then the answer to Bloomberg’s question of ‘how have the rating agencies gotten it so wrong again?’ is arguably clear for all to see.

 

Keywords – China, Huarong, offshore

 

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