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China Default Chain Reaction Looms Amid 192 Day Cash Turnaround

  • Cash conversion jumped to record from 125 days five years ago
  • Wait increases risks firms can't repay debts, Natixis says

Chinese companies have never had to wait so long to get paid, as stockpiles build and customers delay sending funds.

Firms now take a record 192 days to collect payment for their goods or services from when they pay for the inputs, according to data compiled by Bloomberg on non-financial corporations traded in Shanghai and Shenzhen. The cash conversion ratio is up from 125 days five years ago. Liquidity is tightening in China after company profits declined for the first time in three years and as debtors face their hardest time ever paying interest.

QuickTake China's Pain Points

“The longer the cash conversion cycle, the higher the risk of corporates not having enough cash to repay their debts,” said Iris Pang, senior economist for greater China at Natixis SA in Hong Kong. “That creates a chain reaction.”

The weakest economy in a quarter century has prompted at least seven firms to miss local bond payments this year, already reaching the tally for the whole of last year. Among those to default was Baoding Tianwei Group Co., whose listed unit saw its cash conversion cycle spike to 321 days in 2015. Among companies facing the worst delays is Sichuan Renzhi Oilfield Technology Services Co. at 678 days, as the nation’s oil projects were disrupted by corruption probes and plunging crude prices.

“When the economy slows to a point, everyone drags their feet in repaying business partners,” said Xia Le, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “We will see more defaults because longer time to collect cash means companies need more financing to keep their business going, which will increase their financing costs.”

Spooked by the debt failures, investors in yuan company notes have driven up yields for nine of the past 11 days and triggered the biggest selloff in onshore junk securities since 2014. Failures were concentrated in the energy and steel industries.

"We do not classify it as a big shakeout in the whole corporate bond market,” said Patrick Song, Hong Kong-based portfolio manager at CSOP Asset Management Ltd. “This actually signaled willingness by local governments to allow firms they control to face market pressure, instead of simply bailing them out.”

Ratios Worsen

China’s oil, gas and coal companies saw cash conversion days jump 68 percent to 196 days in 2015, Bloomberg data show. A call to Sichuan Renzhi Oilfield’s general line went unanswered.

Energy-sector firms have liquid assets such as cash and account receivables enough to cover 89 percent of their short-term liabilities, the worst ratio in four years, Bloomberg-compiled data show. The average for all non-financial firms traded onshore was 106 percent, also the worst in four years.

Fitch Ratings highlighted rising default risks among China’s coal companies in an April 12 report. Chinacoal Group Shanxi Huayu Energy Co. failed to make a local bond payment on April 6. Yanzhou Coal Mining Co., whose profit plunged 79 percent in 2015, plans to lay off 6,000 workers, Chairman Li Xiyong told reporters in March. China Shenhua Energy Co., the nation’s biggest coal producer, may continue to trim production, according to a March Bloomberg Intelligence report.

“The lower prices, reduced demand and industry over-capacity have significantly affected profitability and cash flow health of not only smaller-scale companies like Chinacoal Shanxi Huayu, but also major coal enterprises such as Yanzhou Coal and China Shenhua,” the Fitch report said. Moody’s Investors Service downgraded Yanzhou Coal to B2 with a negative outlook from Ba3 on Tuesday -- a two-step cut to a junk grade -- as its liquidity position weakens.

Jin Qingbin, Yanzhou Coal’s board secretary, wasn’t available for comment. A call to Shenhua Energy’s investor relations department and one to the firm’s board secretary went unanswered. A call to Chinacoal Group Shanxi Huayu’s general line went unanswered.

At least 70 Chinese issuers have canceled a combined 68.5 billion yuan ($10.6 billion) of local bond sales in April alone, seven times the number of cancellations in the same period a year earlier.

Liquidity pressure on Chinese corporates is escalating, according to ICBC International Research Ltd.

“The decline in operating efficiency has made getting short-term financing more challenging for Chinese companies,” said Cheng Shi, co-head of research at the firm.

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