HONG KONG -- Chinese companies are finally being graded more positively after garnering net negative rating actions for five successive quarters, according to credit agency S&P Global. Yet the budding uptrend -- largely on the back of recovering commodity prices -- might be derailed by rising interest rates and restricted access to offshore financing.

S&P issued a total of 25 positive revisions and 24 negative ones against Chinese companies in the first six months, resulting in one net positive action across a portfolio of 290 companies. That is compared to 71 net negatives in the same period last year, and 16 net negatives six months ago.

Positive rating actions generally mean "upgrades" in creditworthiness and outlook for a company, whereas "negative" refers to downgrades.

"One of the key drivers will be the higher commodity prices that we have seen in the past 12 months," said Christopher Lee, S&P's chief ratings officer for greater China corporate ratings, noting that such market dynamics, along with stable industrial output, had lifted corporate profitability.

He also cited lowered effective borrowing costs and financial discipline among companies in the mining and oil and gas sectors as factors for the stabilizing trend. "Both sectors cut capex aggressively to mitigate the slump in commodity prices between 2014 and 2016," said Lee.

However, the real estate sector, though contributing a large share to S&P's positive rating actions, also saw a high share of potential problems.

Guangzhou-based Yuexiu Property and Beijing-based Sino-Ocean Group were downgraded to junk status in May and June respectively, while Dalian Wanda Commercial Properties, China Jinmao Holdings, and China Overseas Grand Oceans Group were among companies identified as "potential fallen angels," rated "BBB-" with "negative" outlook.

Beijing-based realtor Sunshine 100 China Holdings, rated "B-" with "negative" outlook, was placed in the same "weakest links" category that includes Noble Group, the Singapore-listed Hong Kong commodity trader on the verge of default in May.

With the onshore bond market now "deeply shut," Chinese developers are generally facing higher funding costs, according to Matthew Chow, S&P's lead analyst for China real estate.

"Literally there have not been any new approvals for corporate bonds," said Chow, adding that local banks, which offer project loans, tend to discriminate against developers not backed by the state. As a result, a lot of smaller players are turning to trust loans or asset management plans, so-called non-standard financing that charges higher rates.

Inquisitive regulator

The problem is exacerbated by restricted access to the offshore market allowed by the regulator, the National Development and Reform Commission, which had only approved a few batches of offshore issues by the end of June this year. Chow said the regulator appeared to be particularly cautious about high-profile outbound investors, and being more inquisitive about developers' overseas projects.

Apart from the overhang of sovereign downgrade and rising interest rates, offshore bond refinancing would be a key risk that frustrates the current stabilizing trend of Chinese credits, said Lee. Over $100 billion of issues are set to fall due in 2018, which is twice the amount of this year.

"Capital control is still in place," said Lee. "More importantly, offshore funding is now regulated quite tightly by the regulator," he added. "The visibility for bond issuance quota to be approved or granted is uncertain."

But he emphasized that deleveraging among Chinese companies has yet to materialize. "We are going to start to see leverage coming under control first before deleveraging happens," said Lee, who highlighted that the last six months only showed signs of "stabilization" in terms of leverage level.

As of June the median leverage ratio of Chinese companies was at four to five times, which is considered "fairly high" and "aggressive" by S&P, with those in the property, metal and mining sectors well above five times.

Lee said deleveraging is ultimately dependent on government policies and companies' capital discipline, which might run the risk of being loosened during good times.