Lai See

Fitch presents financial picture but actions contradict report

Fitch is the latest ratings agency to get in on the China corporate governance issue, which has blown up in the faces of market regulators, accountants, analysts and, of course, the ratings agencies in the wake of the trail of accounting scandals in overseas listed mainland-based private companies.

Moody's Investors Service had its moment last week, appearing on the scene - belatedly - with a novel departure from its usual approach, awarding red flags to companies it felt were at risk.

The challenge for the ratings agencies is to appear relevant and to add value to a situation at which they have again arrived late and thus some way behind the curve.

In its latest report on the governance crisis, Fitch gives itself a pat on the back for downgrading its rating for Sino-Forest Holdings by two notches to 'BB-minus' on June 20. By then the stock had crashed 85 per cent and its bond yields had soared. Fitch belatedly withdrew the rating on July 14, noting that, while the company works to address the issues raised by short-seller Muddy Waters, 'the company is unlikely to have capital market access'.

Fitch's press release on its report on Chinese corporate governance notes that the agency, 'lists financial measures which can highlight or mask control and accounting issues such as high levels of revenue and capital expenditure growth, independent valuations, of reserves and materials, working capital traits, low cash-tax-paid, high levels of cash relative to debt and significant profit margins'.

Yet despite the ease with which Fitch highlights the difficulties of arriving at a picture of the financial operations of a mainland-based company, none of this appears to have deterred it and the other agencies from awarding somewhat optimistic ratings. No doubt all of this and more will be explained at their press conference tomorrow. The conference will showcase some heavy hitters from Fitch: Richard Hunter, head of corporate ratings for Europe and Asia; John Hatton, group credit officer for corporates and the author of the governance report; among others.