China Releases Financial Security Assessment Report on Non-Financial Listed Companies

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Aug. 6 – Due to the opening of the Chinese capital market and rapidly increasing numbers of both qualified foreign institutional investors (QFIIs) and RMB qualified foreign institutional investors (RQFIIs) looking to enter the country, the Chinese government has been working to improve the transparency of its capital markets. Further, the government is also looking to provide more guidance for both domestic and foreign investors to navigate the capital market landscape.

In this light, the Credit Rating and Certification Center (CreditCN) of the Chinese Academy of International Trade and Economic Cooperation (AITEC) under China’s Ministry of Commerce (MOFCOM) recently released its Spring 2013 assessment report (hereinafter “Report”) on the financial security of China’s non-financial listed companies (NFLCs) to further detail the state of its markets.

Specifically, the Report stated that 2013 ranked among the worst years it’s ever experienced since 2008 in terms of the overall financial security of China’s NFLCs. Further, it noted that 25.88 percent of NFLCs are rated as either “risky” (those rated “CCC” or lower) or “highly risky” (those listed “C” or lower) with regard to their financial situation.

The report went on to say that China’s secondary industry has seriously slowed down, with 10 of its sub-industries getting downgraded in terms of financial security. It also warned that abnormalities currently exist in net debts, loans, tangible assets turnover, costs and NFLC asset ratios.

The NFLC financial security index (FSI) as a whole has also trended downward over the past three years, finally reaching rock bottom in 2013 when it hit a new five-year low. However, listed companies in the brewery, medical devices and biopharmaceutical industries did manage to obtain positive scores with regard to their FSIs over the first quarter of 2013.

The Report also revealed that the amount of listed companies that are of good financial quality has been decreasing in addition to the amount of “risky” companies increasing.

It further predicted that stricter company reviews will be conducted by the China Securities Regulatory Commission (CSRC) in the future, and that more currently listed companies can expect to be delisted in the years following the updating of China’s delisting provisions.

Moreover, the report concluded that “outstanding” listed companies (i.e., companies with an “AA” rating or above) tend to be located in Shanghai, with companies listed in Zhejiang and Jiangsu ranking second and third, respectively. However, Shanghai also is home to the second largest number of low-rated listed companies (i.e., companies with a rating of “CCC” or below). Beijing ranked first in terms of highly risky listed companies, while Shenzhen ranked third.

The report also listed the nine hottest industries in China’s capital market in 2012, which include: iron and steel, brewery, energy conservation, environmental protection, military aerospace, medical device, biopharmaceutical, mining and new energy and nonferrous metals.

CreditCN was first established in 1987 by the MOFCOM to function as a credit rating and company credit investigation agency.

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