China faces $590b un­paid bills

The Pak Banker - - 6BUSINESS -

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.

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