Paul J. Davies at FT wrote about China’s cash crunch last week. He found that one-third of companies experienced operating negative cash flow in the most recent quarter. More interestingly, he also found that many of the companies’ cash flow slumps are not seasonal.
The fact that the economic slowdown is creating troubles for many Chinese companies is not a secret. Even though the economy is still growing fast relative to many other countries, corporate profitability has been declining. Sales are slowing as the economy slows, while costs are rising for many companies. Overinvestment only led to too much competition, which eats into profit. That is the story we are not quite familiar with.
On top of slowing sales, however, many companies appear to be finding it harder to actually get paid for the sales, which adds to the cash crunch. The chart below from Macquarie last week shows that the cash conversion cycle is now at the highest level in many years, and so is working capital (defined as receivable + inventory – payables).
total working capital (inventory plus receivables less payables) has more than doubled between December 2009 and June 2012 for the 2558 companies in our sample of data. In absolute terms, there is now the equivalent of almost RMB4trn tied up in operational leverage – equivalent to 46% of sales.
Practically this means that the cash conversion cycle of new sales has extended by 73% from 97 days (roughly 3 months) at the end of 2009 to 167 days at the end of June 2012.
So perhaps it is no coincidence that the Chinese government is now concerned about a little old problem: triangular debts. Essentially, they are liabilities arise from delay of payments by one company to another, and many companies would end up owing each other money.
This article originally appeared here: China’s corporate cash crunch, illustrated
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
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