Property in mixed state

MOST Hong Kong companies have highly conservative gearing.

Quite rightly, too. Highly geared property stocks in a place like Hong Kong ought to carry a huge warning sticker and probably end up buried in concrete at the bottom of the San Marino trench until the market has cooled off.

Most local analysts are not counting on Lu Ping solving the property speculation problem in the future SAR that he has spotted, but that does not mean the problem will not end up sorting itself out.

When the hidden hand of the market decides to sort out a problem itself, it is normally at a stage when a lot of people have a lot of loot running on the idea that the problem will not correct.

But that is no reason why gearing should not be allowed to rise in some of the stronger corporations, even if a large chunk of the collateral does come from the property market - hence the 'A' debt rating for Wharf (Holdings).

Wharf has presumably qualified for such a high rating - the equal of the sovereign rating here - because Standard and Poor reckons that even if property prices do collapse, Wharf is tough enough to ride out the storm. Traditionally, that is the way Hong Kong companies sow the seeds for future years of reaping.

The point to remember is that creditors get their cash before equity holders. Suppose a reasonably sized group of companies in Hong Kong get debt ratings and start to gear up - it is a fair assumption, given the lacklustre performance of the stock marketsince interest rates started to rise - they would probably spend the cash not locally, but in China.

Suppose then their developed asset base in Hong Kong collapsed in price. Inevitably, the balance sheets would haemorrhage - nasty mess everywhere - and earnings would probably be clobbered too.

But the strong would survive, and probably snap up those firms which had misjudged the market too badly to continue unassisted.

That would be bad news for shareholders, but the banks and bond owners would get their cash.