October 11, 2017 / 5:55 AM / a year ago

Breakingviews - Syngenta puts Beijing’s unspoken promises to test

WASHINGTON (Reuters Breakingviews) - Chinese officials probably don’t read literary critic Harold Bloom. If they do, they are ignoring his advice to “make what is implicit ... finely explicit.” A dispute over whether the government will stand behind the potential liabilities of Syngenta SYNN.S, a Swiss seed maker acquired by a Chinese state firm earlier this year for about $43 billion, shows the problems that result from habitual murkiness.

The logo of Swiss agrochemicals maker Syngenta is seen on a farm in the village of Geispitzen, France June 27, 2017. REUTERS/Arnd Wiegmann

Syngenta is potentially on the hook for a big legal bill after U.S. farmers and agricultural firms claimed it sold them seeds for a strain of corn unapproved for export to the People’s Republic. China’s State-owned Assets Supervision and Administration Commission, which oversees central state-owned companies such as Syngenta’s parent, ChemChina, says the government won’t foot those costs. Rating agency Standard & Poor’s is now hinting it could strip away Syngenta’s prized investment-grade status. The seed maker’s immediate parent may be too indebted to help, with adjusted total debt of about 11 times EBITDA, according to Moody’s Investors Service.

At issue is a dynamic that plays out across China’s financial sector: implicit guarantees. It’s particularly rampant in local government financing, where investors assume – but without any actual confirmation – that the central government stands behind local governments, which in turn stand behind the companies they set up to fund projects. Even though Beijing’s actual support is uncertain, bond spreads between local governments and their financing vehicles, of which Fitch reckons around 4 trillion yuan ($610 billion) issued domestically since 2015 remain outstanding, are narrow.

That equilibrium works to Beijing’s interest. The official line keeps the door open for regulators to allow selective defaults, but avoid widespread blowups. Financially speaking, the unspoken promise that officials will step in if a crisis erupts keeps borrowing costs low.

In practice, Syngenta is now part and parcel of a state company. It would be better for the government to accept that, and show investors where the line really lies. Implicit guarantees distort capital flows and encourage investors to underprice risk. Then again, at a time when politicians and capital providers alike worry about the real levels of debt in China’s financial system, keeping things murky may seem like the safest strategy.


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