Payment delays, stock build bleed cash from corporate China

Thu Feb 4, 2016 6:13pm EST
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By James Pomfret and Umesh Desai

DONGGUAN/HONG KONG (Reuters) - If, as the adage has it, turnover is vanity, profit is sanity, but cash is reality, a Reuters analysis of working capital at 1,200 Chinese firms shows much of corporate China is hurtling towards a reality check.

As China's economy hits its slowest growth in 25 years, businesses are finding ever more cash tied up in unsold stock and unpaid invoices as industry shirks the pain of trimming capacity and struggling customers take longer to pay.

KPMG China partner Fergal Power, who specializes in distressed companies, says most Chinese companies prioritized market share and revenue growth in the boom years, with "less discipline in managing working capital in China than we have seen in other markets".

The Reuters analysis, which covered all companies on the Shanghai and Shenzhen bourses with a market value of more than $500 million, shows that on average they wait about 59 days to be paid by customers, compared with 37 days in 2011.

For some sectors the picture has deteriorated much more sharply; energy companies now wait 80 days, up from 24.

For industrials, which already waited 61 days to get paid in 2011, that has climbed to 94, while information technology companies are involuntarily funding their customers for 112 days, up from 76.

"The rate of growth of receivables has exceeded sales growth in the industrial sector for the past few years... The picture one gets from data is that this is a nagging problem," said Cliff Tan, Bank of Tokyo-Mitsubishi UFJ analyst.

"One sign that the problem is worsening is the emergence of funky shadow banking products, because of a lack of access to more traditional banking products," adds Tan.   Continued...

A worker carries a metal rod inside a factory applying powder coating in Dongguan, southern China January 28, 2016. REUTERS/Bobby Yip