Don’t believe suggestions that China’s housing and property crisis is easing – if anything this week has shown it to be a black hole that is only getting wider and deeper.
There is simply no good news – not from official statistics, prices, demand, lending, share prices and credit.
While the continuing Covid outbreaks are having an added negative impact, the looming debacle can be blamed on the long running sores of dodgy accounts, weak regulatory oversight, weak finances, huge and growing debts and government policies that have been at odds with reality since 2015 – too lax and then too tight at the wrong times in the cycle.
In the past week, six Chinese developers, including the major international borrowers, China Evergrande Group and Kaisa Group Holdings have revealed that they can’t publish audited annual results by Hong Kong’s March 31 deadline.
Some blamed pandemic-related problems for the delay, others the departure of long-standing auditors who have recently dropped the property groups, meaning new auditors have had to be found and spend time learning their new clients.
All excuses (including the shock news at a subsidiary of China Evergrande that unnamed ‘banks’ had taken $US2.8 billion from its property services subsidiary without telling anyone) designed to delay the inevitable bad news that these companies have incurred losses that will total billions of dollars.
The latest situation follows plunging sales, a string of defaults, broken promises to investors and revelations of previously hidden debt at numerous real-estate companies.
One unnamed western analyst reckons there are a string of ‘going-concern warnings’ from auditors just waiting in the wings for Chinese property companies – not all, but quite a few and enough to rattle confidence and the entire Chinese financial system.
Shareholders and creditors have been in the dark now for at least six months about the true financial positions of developers and look like facing months more of delays – China Evergrande is promising a restructuring plan by July of this year, meaning it will be almost a year between financial reports being publicly released to the market.
The lack of timely disclosures by developers may “exacerbate investor concerns over their financial standing and liquidity, and further strain their already weak access to funding,” according to Kaven Tsang, senior vice president at Moody’s Investors Service.
Typically, a failure to publish audited results on time would lead to stocks being suspended but the Jong Kong Stock Exchange says, citing Covid protocols that companies would be allowed more time to report and would be allowed to present unaudited accounts, according to reports in the Wall Street Journal this week.
Evergrande said Tuesday, as it and two key subsidiaries said they would delay results, that “drastic changes in the operational environment” had prompted the introduction of a large number of additional audit procedures.
Edward Chan, a director at S&P Global Ratings told the WSJ that auditors for property companies now “have to do a lot more work to fulfil their audit requirement.”
But Jizhou Dong head of China property research at Japanese investment banking giant, Nomura summed up the situation best of all, telling the WSJ:
”Developers who changed auditors have lost their credibility to the capital markets”… and “Even if they manage to announce annual results after the auditor change, the markets will still question the trustworthiness of their financials.”
