Is China Done With Its Market Crackdown? Ask Fosun

Global investors are wondering these days if Beijing has decided to ease a year-long regulatory crackdown that has cost it more than $1 trillion in losses. After all, China accounts for around a third of the emerging market benchmark index. It’s just too big to ignore.

Without a clear policy statement, wealth managers have resorted to reading tea leaves. For example, a deal that would allow US securities regulators to review the audit documents of New York-listed Chinese companies in Hong Kong could be a sign that China is looking to attract foreign investment again. Beijing may also try to calm capital markets by delisting the listings of Didi Global Inc. and Alibaba Group Holding Ltd.’s fintech subsidiary Ant Group Co. revived.

So far there have been mixed signals. Take the housing market, where local governments have turned around. Last Thursday, industrial centers like Qingdao and Suzhou lifted restrictions on buying used and non-resident homes, respectively, only to back down the next morning. These hiccups led investors to conclude that President Xi Jinping’s mantra that housing should be inhabited, not speculated, remains firmly in place. As a result, August’s mini-rally in high-yield dollar real estate developer bonds quickly lost momentum. Then there’s Shanghai-based private equity giant Fosun International Ltd., whose empire includes an English Premier League football club and Portugal’s largest bank, and French resort group Club Med. Its stocks and bonds have seen sharp sell-offs recently, as global rating agencies have downgraded the company citing refinancing risks.

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These risks reflect investors’ concerns about onerous government agencies. Last week, Fosun’s in-house Communist Party secretary paid a visit to the Beijing branch of Sasac — the State Council’s State Assets Supervision and Administration Commission — the company said in a statement.

The powerful agency has seen selling pressure on some of its portfolio companies of late. In early September, a Fosun subsidiary pledged a 7.9% stake in Beijing Sanyuan Foods Co. to a broker. Sanyuan’s largest shareholder is a state-owned company directly overseen by Beijing-based Sasac.

Fosun said Beijing Sasac conducted a routine information-gathering survey with the company, and the agency previously issued such notices to other companies. The two parties held intensive 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 brutal crackdown that saw little-known government agencies appear out of nowhere to swipe billions of dollars off the companies’ market value — think of the cybersecurity watchdog’s aggressive stance that ultimately led to the ride-hailing giant Didi has been dropped from New York – traders are understandably shy.

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If we use the loan-to-value ratio as a measure of financial security, Fosun’s balance sheet is healthy at 39% for an investment company. However, with insufficient cash on hand and access to the dollar bond market closed, Fosun must rely on refinancing bank loans and quick asset sales to meet its near-term obligations. According to S&P Global Ratings, about 53% of debt matures within one year. In other words, Fosun’s ability to quickly exit its investments is critical.

With just 117 billion yuan ($17 billion) in debt, Fosun is nowhere near as big as China’s indebted developers. The company is important, however, as it is a key barometer in the high-yield corporate bond market. Last year, as real estate developers collapsed — about a third of the top 100 homebuilders defaulted or asked for loan extensions — Fosun became the natural destination for investors to park their money. It’s got size, liquidity — and until recently — decent credit. Fosun has about $4 billion in outstanding dollar bonds, with the smallest issue being a respectable $450 million. It used to be a BB rated company.

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Well, this safe haven might not be so safe. And the market for high-yield dollar corporate bonds has continued to cool.

When a company is in trouble, credit analysts can always point a finger at one metric or another and say that cash flow management could be better. However, even the best private companies can do poorly when government becomes overly zealous or intrusive.

The Chinese government does not currently have the best reputation on the capital markets. If Beijing still wants foreign capital, it must tell its various agencies to back off and keep quiet. Their unsolicited visits to companies scare investors.

More from the Bloomberg Opinion:

• Private equity giants face liquidity problems: Shuli Ren

• Chinese equity listing compromise is US win: editorial

• Xi Jinping sends mixed messages to investors: Shuli Ren

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Shuli Ren is a columnist for Bloomberg Opinion covering Asian markets. A former investment banker, she was a market reporter at Barron’s. She is a CFA charterholder.

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