Rodney Johnson | Wednesday, November 14, 2012 >>
There is an old saying that goes: if you owe the bank $1 million, you’ve got a problem… if you owe the bank $100 million, then the bank has a problem. Chinese companies must be starting to feel a lot like banks with problems because they are owed an awful lot of money… and the clients aren’t paying.
The companies listed on China’s stock exchange reported a sharp jump in unpaid bills in the third quarter, according to the Financial Times. It seems that business went flat, so 66% of the companies showed a jump in accounts receivable.
Now, having someone owe your company money can be a good thing. Perhaps they’re a client. But if they owe the money and are not paying…well, that’s not so good. Your company still has bills to pay, but has less income. It doesn’t take long to figure out this is a bad situation.
China’s growth rate is just under 8% this year, which on the face of it sounds like a great place to be. Unless your growth rate last year was 9% and had been estimated near 9% again…
In fact, this year will likely register the lowest growth in China in the past decade.
Which leads to slower bill payments.
One company in China has seen an 83% increase in accounts receivable while another has seen a 169% increase.
All of this is part of the same chain we’ve been discussing for some time. The Chinese made a lot of money by selling cheap items around the world. Their exports now represent one-third of their GDP.
With Europe in a recession and the U.S. hovering not far behind, the largest export markets are no longer big buyers. Instead they’re cutting back.
So the sellers sell less, which means they eventually buy less from their own vendors both at home and in supply countries like Japan and South Korea. This backs all the way up to the natural resource providers, which greatly affects countries like Australia and Canada (which Harry discussed yesterday).
We often harp on the problems in the U.S., and we readily point out the issues in Europe, particularly the euro zone. What we don’t often point out is that the problems these countries face don’t stop at the borders. They flow across national lines through the veins and arteries of international trade.
In a sense, a guy in Peoria that loses his job and then finds a new one at a 30% reduction in pay ends up being a problem for exporters in China because he cuts back on spending. This reverberates through the system until the guy in Peoria has caused a real estate slowdown in Sydney. That is, as long as there are enough guys in Peoria in the same situation.
The fact that Chinese companies are not paying their bills is simply one more piece of evidence pointing to a global slowdown, which won’t be solved by jawboning at the ECB or even by voting in the U.S. election.
Our current situation is wrapped up in debt and demographics. Only time and hard choices will heal the wounds.
That’s why we are vigilant in our watch, continuing to caution readers about getting too complacent.
So remain cautious. We fear that things will get very difficult in the months ahead.
Ahead of the Curve with Adam O’Dell
China Finance Online – NASD: JRJC – The Harbinger of Doom
The accounts receivable warning siren isn’t a new one. In fact, just last year this measure foretold a massive 86% drop in one particular Chinese stock.