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In a special report û titled China's Listed State-Owned Entities Governance, Support and Bankruptcy û Fitch notes that credit analysis needs to weigh up the potentially weak corporate governance and the poor transparency that surrounds state-owned entities (SOEs) against the benefit they might derive from government intervention.
"Concentrated ownership is the norm in China, be it for SOEs or private enterprises, and this issue has brought about a unique situation for SOEs as the controlling shareholder and regulator are both agencies of the government, making it more difficult to implement effective checks and balances," says Frederic Gits, senior director with Fitch's corporates team. "However, external scrutiny as a result of foreign share or bond issuance, can help improve the quality of corporate governance.ö
To make listings on the stock market possible, listed entities generally include the highest-quality assets of the group, and exclude legacy issues such as lower-quality assets, redundant workers and pension liabilities; these are usually kept at the level of the unlisted and fully state-owned parent, about which only scant information is available. Unless the agency is confident that effective corporate governance mechanisms are in place to preserve resources within a listed company, its ratings need to factor in the likelihood of significant legacy issues and other liabilities at the parent level, as well as the possible support the parent might receive from its public shareholders.
Fitch says that it is reasonable to believe that the state will assume responsibility for some of the legacy issues domiciled at the unlisted parent, but as there is no clear commitment to do so, it remains possible that some of these issues will ultimately have to be dealt with by channelling resources from the listed subsidiary. The less the state is expected to support the parent, the more these issues need to be factored into the rating of the listed entity.
Although general and social policy considerations (such as the need to avoid disruptions to the local economy) are key factors in the provision of state support for a SOE, it would be incorrect to assume if an enterprise is either fully state-owned or state-controlled that the state will come to its rescue should it run into financial difficulties, Fitch says.
Fitch believes intervention is more likely for companies that have significant market positions in industries of strategic importance to the national economy, and if their financial difficulties are deemed temporary and unlikely to put the long-term viability of the firm in jeopardy.
However, as examples from other countries demonstrate, government intervention does not always fully prevent problems for creditors. Also, Fitch notes that SOE bankruptcy cases have been limited to relatively small firms, and have not affected large companies, admittedly in a rather buoyant economic environment.
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