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How bad is China’s cash crunch?
And the hits just keep on coming.
Searching for warning signs in China’s economic slow down? Look at corporate cash flow.
Both at the macro-economic and company level, reports suggest that Chinese companies are increasingly short of cash – and are having to resort to ever more desperate means to get hold of it. The overall picture is hard to grasp, given a scarcity of data, but the evidence is multiplying.
Take for example, short–term lending, which has mushroomed this year, as this chart shows, using official loan growth data:
As Mike Werner at Bernstein research wrote in a note:
July loan growth was once again skewed towards short-term loans as 29% of new loans were discounted bills (usually used to finance working capital and trade), well above the trailing 12-month average of 12%.The received wisdom is that banks do not want to lend in the current environment, but they are clearly coming under pressure from companes, perhaps with high inventories or part-finished projects, that are crying out for short-term money to keep operations ticking over.
Machinery makers such as Zoomlion and Sany Heavy have been affected by fears of a cash squeeze in the construction and property development sectors. As the FT reported, Hunan-based Zoomlion, which is listed in Shenzhen and Hong Kong, asked shareholders in June for approval for new borrowing facilities – much bigger than its $12.3bn market value at the time.
The cash shortages now seem to be spreading. Analysts at Jefferies in Hong Kong noted this week that tight working capital, rising cost pressures and increased inventories have undermined earnings and cash-flows. They wrote:
“Investors should judge companies on the basis of cashflows and not earnings as the quality of profits comes under scrutiny. The recent dividend cutting may be a sign of fragile cashflow.”Now consider two interesting items from this week’s South China Morning Post. One is a piece on what they call “triangular debt”, which involves overseas customers delaying payments typically from less than 60 days to an average of 90 days. This starves exporters of cash and limits what they can pay to their own suppliers.
It also reported on the effect of the economic slowdown on the abilities of steel, coal, power, non-ferrous metal, and machine building industries to pay suppliers and creditors.
In other industries too, as my FT colleague Simon Rabinovitch noted last week, there is a worrying build-up in inventories. This also hits cash flows as money for materials, power and labour is still going out the door, while sales are bringing in less.
But it is not just in the supply chain where cashflow strains are being felt. In a note about Chinese corporate earnings this week, analysts at CICC noted a new variable that was starting to catch investors’ attention: local authorities’ demands for more tax yuans. The analysts said that tax rates at a raft of companies had risen beyond expectations.
“Managements explained that it is because some local subsidiary had been requested by the local government to pay full enterprise tax rate this year, rather than the preferential high-and-new-tech-enterprise tax rate they had been granted with.All this at a time when profits are slowing. Combined industrial profits dropped 5.4 per cent in July from a year ago, the fourth month in a row that’s seen a drop, according to the National Bureau of Statistics.
Why? The Companies said they had been simply told that local government needed more money from enterprises this year
Evidence of the cashflow problems can also be seen on the central bank level. Last week, the People’s Bank of China pumped a net Rmb278bn into the financial system using reverse-repurchase agreements, the biggest such cash injection since January, according to numerous sources.
Simon Derrick, currency strategist at BNY Mellon, has been looking at the cashflow pipe as a whole and pointed out in a note this week that between June of last year and June of this year China’s FX reserves grew by just 1.32 per cent.
“In contrast, the average year-on-year growth rate since 2001 has been a little over 30% while the lowest numbers prior to the latest set were 8.5% in March, 11.7% in December 2011 and 12.1% way back in March 2001 … the real change in the pattern of growth has emerged since the third quarter of last year.He added that three factors – the euro crisis, less accommodative monetary policy in the US and a slowdown in China – explain why the pace of inflows into China has dropped so markedly.
For a country still highly reliant on exports, this cashflow problem is not only about the supply of credit and investment, which the central government can influence, but also about overseas demand, which it can’t.
Premier Wen Jiabao in his visit to Guangzhou last week talked about speeding up tax rebates and widening the range of export insurance, especially for small-scale enterprises.
Such actions along with the reverse repo measures can ease the cash crunch while avoiding a boost to credit creation for property, or stoking inflation.
But a big worry is how the cash squeeze feeds back into the banking system. Investors and rating agencies are already struggling to maintain a straight face when looking at non-performing loan data…. Without an opening up of the cash flow pipe from somewhere, it’s going to get more and more difficult for the banks to keep low-balling the numbers.