State Of Affairs Of The Chinese Corporate Sector – Part 1 by Bryce Coward, CFA – Gavekal Capital Blog
The Chinese economic situation has been firmly out of the limelight for the better part of three months now as the country’s fiscal kitchen sinking has shown obvious signs of ramping into gear. If the world’s investors and economy watchers have breathed a collective sigh of relief, the Chinese corporate sector must be partying like it’s 1999 because Chinese businesses were headed strait off a cliff.
Let’s not mince words: 2015 was by far the worst year on record for Chinese corporations in aggregate.
Talk of inflation has been swirling for some time amid all the stimulus that's been pouring into the market and the soaring debt levels in the U.S. The Federal Reserve has said that any inflation that does occur will be temporary, but one hedge fund macro trader says there are plenty of reasons not to Read More
In the below table we aggregate (sum up) all of the non-financial, non-utility corporate financial statement data for all 1133 constituents of the Shanghai Composite going back to 2005 using fully reported fiscal year-end data for each company.
2015 saw a top line contraction of 9%, a bottom line contraction of 23% and the lowest net margin (3%) on record. Meanwhile, liabilities grew by 5%, current assets grew by 5% and current liabilities grew by 2%.
In other words, sales declined outright by 9% (vs growth in every year going back to 2005) and Chinese businesses added to their stock of total liabilities and working capital. There is a technical term for this,channel stuffing, in which businesses attempt to keep the music playing by extending trade credit to one another. In 2015 the music stopped, but the channel stuffing continued.
In the next table below we show the spread between growth in each current liabilities and current assets and sales growth. Working capital has been growing faster than sales since 2012, but in 2015 the spread between working capital growth and sales growth exploded. That is just another way of saying that the fragility of the Chinese corporate sector was…enhanced…in 2015, a topic we’ll hit more on in Part 2.