Michael C S Wong

Transcription

1 Michael C S Wong 2014

2 Michael C S Wong

3 Analyzing corporate credit risk: The myths in China Dr. Michael C S Wong Associate Professor, College of Business, City University of Hong Kong Chairman, CTRisks Rating Visiting Fellow, Essex Business School, University of Essex Michael C S Wong

4 Disclaimer by the speaker CTRISKS Rating Limited is a credit rating agency licensed in Hong Kong under the Type 10 Regulatory Activity of the Securities and Futures Ordinance in Hong Kong Dr. Michael C S WONG is a responsible officer licensed under the Type 10 Regulatory Activity of the Securities and Futures Ordinance in Hong Kong The following speech is delivered in the personal capacity of Dr. Michael C S WONG and does not represent the opinion of CTRISKS Rating Limited CTRISKS Rating Limited has not yet reviewed or endorsed the contents of the speech Michael C S Wong

5 Agenda 7 myths about China corporate credit risk Observations and summary NB: Graphs and tables are extracted from a research paper of Wong and Zhou (2014) Analyzing corporate credit risk: The myths in China. under review by Accounting and Business Research Michael C S Wong

6 Myth 1: Bank loans to corporations in China have high default rate Michael C S Wong

7 Major banks in China ICBC: Industrial & Commercial Bank of China (RMB clearing bank in Singapore) BOC: Bank of China (RMB clearing bank in Hong Kong via BOCHK) CCB: China Construction Bank (RMB clearing bank in London) ABC: Agricultural Bank of China BOCOM: Bank of Communications (RMB clearing bank in Taipei and Seoul) Michael C S Wong

8 Myth 2: China corporate bonds have high default rate On March 7, 2014, a surprising news about corporate bond default happened in China. BBC News (2014) wrote the heading as Chaori Solar in landmark Chinese bond default. This is the first default case of China publicly-listed domestic bonds since Michael C S Wong

9 Recent cases of government bailouts in China Time Issuer Event Outcome April 2012 Shandong Helon (a chemical fiber manufacturer) November 2012 March 2013 April 2013 Xinjiang Chalkis (a state-owned food company) Suntech Power (the largest solar panel maker in the world) LDK Solar (a solar equipment maker) It was unable to pay RMB 400 million in commercial paper maturing on April 15, It was unable to repay RMB 400 million in short-term financing bills on time on November 7. It was unable to pay USD $541 million of offshore bonds due March 15 and breached terms of other outstanding loans. Its shares and bonds were traded in the USA. It was unable to settle a USD$23.8 million bond payment because of cash flow problems. Bailed out by the China government Bailed out by the China government Bailed out by the China government Bailed out by the China government Michael C S Wong

10 Myth 3: State-owned enterprises should be safe because they will be bailed out by the China government Xie (1999) quotes, from 1995 to 1998, more than 2,000 urban credit cooperatives were merged into 88 city commercial banks Hainan Development Bank (closed by PBOC in 1999) Guangdong International Trust and Investment Company (Applied for bankruptcy in 1999) Michael C S Wong

11 Myth 4: Underperforming companies warned by the securities regulator in China will likely go bankrupt soon. China Securities Regulatory Commission (CSRC) initiated in 1998 a warning signal Special Treatment ST to those listed companies under financial distress. The indicators include: a) Companies that had negative cumulative earnings over two consecutive years or net asset value (NAV) per share below par value (book value). b) Companies that had negative earnings for one year, but the current year shareholders equities are below its registered capital. c) Companies that received the auditors going concern opinion. Michael C S Wong

12 Statistical models to predict ST Study Altman, Lin and Zhang Tang, Zang and Zhu and Chen (2007) Ceng (2011) (2014) Sample for building a model 30 ST and 30 non-st in 683 ST and ST and and 1999 non-st in non-st in Statistical method Discriminant Analysis Logistic Regression Discriminant Analysis X-variables incorporated Total Liability / Total Asset + + Operating Profit / Interest Paid - Net profit /Average Asset - Operating Profit / Total Asset - Working Capital / Total Asset - - Current Asset / Current Liability - Inventory Turnover (days) + Retained Earnings / Total Asset - Year of continuous listing + Stock Turnover rate + Annualized stock return volatility + Beta - Corporate earnings yield Market earnings yield - Stockholding concentration (top 10 shareholders + holding in %) Total Asset - Sales / Total Asset - - Sales Growth Rate + 12 Market value of Equity / Asset +

13 Myth 5: Listed corporate bonds in China should be safe Michael C S Wong

14 Corporate credit risk is rising in China China export drops drastically w.r.t. GDP Large companies are highly leveraged Shadow banking are out of control Anti-corruption campaigns slow down business activities Property price are falling Michael C S Wong

15 China Export/GDP Ratio (Source: World Bank and the author s estimates) Export/GDP (%) Michael C S Wong

16 No monetary easing in China (CNBC Sep 11) Premier Li Keqiang said in World Economic Forum held in Tianjin (Sep 10, 2014): "Instead of adopting strong economic stimulus or easing monetary policy, we have vigorously promoted reform and economic readjustment." Michael C S Wong

17 Myth 6: AAA/A-rated corporate bonds in China should be safe Michael C S Wong

18 Average yield spreads of rated bonds Michael C S Wong

19 Myth 7: Corporate financials are key determinants of their default and bankruptcy Journal Authors Sample Arguments, findings and implications Journal of Financial Economics Journal of Development Economics Journal of Banking and Finance Journal of Financial and Quantitative Analysis Fan, Wong and Zhang (2007) Li, Meng, Wang and Zhou (2008) Firth, Lin and Wong (2009) Bailey, Huang, Yang (2011) 790 IPOs and their 7255 CEOs and directors in privatelyowned China enterprises surveyed in enterprises surveyed in announced bank loans in China from January 1999 to December The authors find that 27% CEOs of 790 newly partially privatized firms in China are former government officials. Firms with strong political connections tend to have worse financial performance in the 3-year period after their IPOs. The authors find evidence that firms with strong link with ruling Communist Party tend to have better financial performance and they find it easy to get bank loans. The authors conclude that firms with the state as a minority shareholder find it easier to access bank loans and political connections are especially important to access bank loans in areas with a less developed banking sector. The authors argue that China stated-owned banks mostly serve political goals and lend to avert unemployment and instability. They find empirical evidence that poorly-managed firms likely get loans from the state-owned banks and longrun financial performance of these firms after bank loan announcements continue to be poor. Their results suggest that commercial judgment is not a factor for state-owned banks to lend. Michael C S Wong

20 Observations and summary Financials are less important in predicting credit risk in China. State-supported and politically-connected entities tend to be poor in financial ratios but their cash flows are relatively stable. Top-tier banks are usually strong in their asset quality but second-tier banks and nonbank financial institutions are not. Shadow banking is a major concern but it is hard to measure how serious the problem is. Michael C S Wong

21 Observations and summary Governmental officials are very inclined to bail out troubled companies because of complicated political consideration. But it is not a guarantee. Credit risk of a single corporate bond is high but a diversified bond portfolio may offer investors lucrative risk-adjusted returns. Michael C S Wong