China faces $590b unpaid bills
Not since 1999 have China's companies had so much trouble getting customers to actually pay for what they've bought.
It now takes about 83 days for the typical Chinese firm to collect cash for completed sales, almost twice as long as emerging-market peers. As payment delays spread from the industrial sector to technology and consumer companies, accounts receivable at the nation's public firms have swelled by 23 percent over the past two years to about $590 billion, exceeding the annual economic output of Taiwan.
The raft of unpaid bills -- bigger than at any time since former Premier Zhu Rongji shuttered thousands of state-run companies at the turn of the century -- shows how cash shortages at the weakest firms threaten not only banks and bondholders, but also China's vast web of interconnected supply chains. With corporate bank- ruptcies projected to climb 20 percent this year, more Chinese businesses may be forced to choose between two unpleasant options: keep extending credit to potentially insolvent customers, or cut off the taps and watch sales sink. "There is a knock-on effect through the economy," said Fraser Howie, the Singapore-based co-author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise," who has followed the nation's markets for more than two decades. "Part of the end game is default and closure."
It's easy to see why collecting payments is getting harder in China. Businesses and consumers have been squeezed by the deepest economic slowdown since 1990, while overcapacity has fueled an unprecedented stretch of declines in producer prices. Record corporate debt levels have left many firms struggling to meet their liabilities, with corporate insolvencies jumping by 25 percent in 2015, accord- ing to Euler Hermes. The world's largest trade credit insurer sees another 20 percent increase in Chinese bankruptcies this year, the most among 43 major markets. People's Bank of China Governor Zhou Xiaochuan underscored his concern about rising debt levels over the weekend, saying in a speech in Beijing that corporate lending had become too high.
"It's a big problem when you have rising insolvencies, a bad economic environment and less liquidity for small companies," said Mahamoud Islam, the senior Asia economist at Euler Hermes in Hong Kong.
Those headwinds are increasingly visible in Chinese financial statements, where the accounts receivable and sales entries allow analysts to calculate "days sales outstanding," or how long it takes a firm to get paid. The median collection time of 83 days, compiled by Bloomberg from the most-recent filings of mainland-domiciled firms, has climbed from 79 days in 2014 and 55 days in 2010. It's higher than in any of the world's 20 biggest economies except Italy, and compares with the 44day median for companies in the MSCI Emerging Markets Index.
Chinese industrial firms take longest to convert sales into cash, at 131 days, followed by 120 days for technology companies and 118 days for telecommunications firms. While it varies by sector, a reading of more than 100 days is typically a "red flag," said Amy Sunderland, a money manager at Grandeur Peak Global Advisors in Salt Lake City, Utah. She's been avoiding companies in the infrastructure and environmental-protection industries in part because they're taking too long to collect payments. "It could indicate future cash flow problems" or that a company is booking revenues too aggressively, said Sunderland, whose Global Opportunities Fund has gained an annualized 9.4 percent over the past three years, beating 94 percent of peers tracked by Bloomberg.