This article is on how the corporate governance and corruption issues have affected the high yield USD corporate bond market in China/Hong Kong.
The Berlin-based Transparency International has released its 2012 Corruption Perceptions Index (CPI). China continues to be ranked low; 80 in 2012, 75 in 2011 and 78 in 2010. However, as compared to the other BRIC nations, it is better placed; with Russia at 133 and India at 94 while Brazil is ranked best at 69.
The Chinese HY USD corporate bond market has seen incidences/allegations of weak corporate governance in 2012. Evergrande, a large Chinese property company, was accused of accounting irregularities as well as corruption with respect to land acquisitions, by a short seller Citron in June this year. The bonds were down, though they quickly recovered and recently rallied significantly. China South City, a small scale property developer focusing on integrated logistic centres, was accused recently of misuse of land. The bonds tanked initially but recovered post the clarification issued by the company that its projects are in coordination with the local governments and as per the government procedures. The controlling shareholder cum Chairman of Glorious Property was accused by the US SEC of insider trading and he resigned after settling the case with SEC by paying some fine. Agile, a better respected Chinese property credit, was in the news after its owner and Chairman was arrested for alleged indecent assault. Further, it informed the investors about the resignation of its CFO, a month after he resigned. Renhe, an underground shopping mall developer, has been a distressed credit after reports on accounting irregularities. The company’s half yearly results showing weak business fundamentals with zero sales and continued non-collection of sales receivables, adding weight to the allegations. This has been the only credit affected while the rest have experienced only short term impact.
Hong Kong is the second best ranked amongst the city/states in Asia (ex-Japan), next to Singapore which is placed at 5. However, Hong Kong’s ranking has declined to 14 in 2012 from 12 in 2011. The year 2012 witnessed the arrest of directors of Sun Hung Kai, one of the largest property companies, for bribery. The legal proceedings are going on.
Corruption is rampant in most of emerging Asia, some allegation or the other keeps cropping up; some serious while some are benign. As long as the allegations do not link to insolvency, the investors seem to be digesting the news.