Posted on 09/19/2012 6:02:54 AM PDT by blam
China’s Corporate Cash Crunch, Illustrated
19 September, 2012, 15:00.
Posted by Zarathustra
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).
Source: Macquarie
Macquarie:
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.
China has backed itself into a corner. They have way too many males because of their misguided population control efforts and now a faltering economy. Add a political regime that has to maintain it’s relevance. This does not look good.
How would the Chinese Mercantalist Government go get billions of dollars of liquidity in a hurry?
By selling huge quantities of U.S. Government Bonds, of course.
Gee, the price of those bonds might go down fast.
And as with bonds, when the price of them goes down, the interest rate on them goes up.... fast.
So, China can cause a massive flare of interest rate inflation in the U.S. by propping up its companies.
Huh!
The price of THOSE bonds in the secondary market go down to an equivalent yield. A flood of US debt on the market would affect sales of new bonds, which would certainly hurt us now but if we ever stopped borrowing (big if) that would be diffused.
Ping
“By selling huge quantities of U.S. Government Bonds, of course.
Gee, the price of those bonds might go down fast.”
I don’t want anyone to think I’m particularly fond of the Chinese Imperialist/Mercantilist Government, and I have long been of the opinion that any American who tries to do business with the Chinese will always be played for the fool that he is.
Having said that, though, for better or worse the Chinese have coupled their economy to ours. Sure, they could try to have a fire sale on American bonds, but that destroys our economy, and their most lucrative export market. Also, they dump the bonds and lose money, which impairs their financial condition.
I don’t see them doing it out of their own self-interest. I think they’ve been wanting to de-couple from us since 2009 when they saw we had no serious government fiscal policy, but they haven’t figured out how. Not yet anyway. Dumping our bonds would be one way to do it, but I don’t think they could stand the pain.
Thanks Kenny Bunk.
Simply put, they would have to sell those bonds like selling a house at a deep discount, almost giving it away.
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