Moody's analyzes Chinese companies for 'red flags'

A little late, but hopefully not too late.  Moody's comes up with report (article here) looking for 'red flags' amongst China bond issuers.  Companies named in the report include West China Cement, Winsway Coking Coal, China Lumena, etc.

I've always thought China high yield issuers seem to be particularly prone to accounting fraud.  There seems to be adverse selection going on.  It is not completely clear why this is the case, but I think it is a combination of:

• A need for fraudulent companies to tap the capital markets and/or borrow frequently due to its negative free cashflow and a need to sustain the ponzi scheme (after all, the whole point is to defraud the capital markets and siphon off cash).  
• Local Chinese banks are unwilling to lend to the company - in some cases, the local banks are probably suspicious of the company (it may also be unwise for a fraudulent company to defraud a state-owned bank).  The company has to resort to more unsuspecting overseas investors.
• High yield (overseas) buyers generally have larger risk appetite for leverage and 'hair' around companies (the attractive 'China story' doesn't hurt).  In return, they seek higher coupon/returns.  But the high coupon/cost never deters the truly fraudulent company, it is a 'cheap' way to keep up a facade and continue to siphon money
• Chinese high yield issuers are generally required to be restructured offshore, which takes the creditors further away from the assets (from a security structure standpoint).  And in the case of a default (or if the fraud is exposed), it is generally very hard to enforce in China when you are an offshore creditor.

Some Chinese high yield issuers that come to mind are: Sino-forest, GOME, China Fisheries, China Forestry, and a list of Chinese real estate companies.  Some are clearly fraudulent (like Sino-forest and China Forestry), others are simply full of 'red flags'.