The Lightbulb Goes Off In China: "If You Don't Pay Me And I Pay Others, I Am The Sucker"
Just last month we highlighted how the collapse in China's shadow-banking system, it's concomittant credit crunch, and vicious circle of commodity-financed credit creation could spread contagiously to the rest of the world - through refusal to pay. It seems we were prophetic as Reuters confirms that money owed to Chinese firms by their customers has reached a record high. As China's economy continues to cool, companies are waiting longer and finding it harder to get paid for goods and services they've already sold, leading to record amounts of receivables - and potential write-offs - on corporate balance sheets. As one Chinese business owner exclaimed: "If you don't pay me and I pay others, aren't I just a sucker? I'm not that stupid." Receivables on average (across 2300 firms) reached $160.49 million at the end of last year, more than double the $65.9 million average at the end of 2009 and median collection time for billings crawled up from 71.4 days to 90.42 days (the first time above 90 days). "It's a pretty loud warning bell," warns a Peking professor.
As China's economy continues to cool, companies are waiting longer and finding it harder to get paid for goods and services they've already sold, leading to record amounts of receivables - and potential write-offs - on corporate balance sheets.
At Longyuan Construction Group Co, an east China builder of high-rise offices, apartments and highways, receivables last year inched up 4.9 percent to 4.1 billion yuan ($657.3 million), while on average collection times extended to 95.2 days, compared with 76.3 days for 2011.
Slow collection of money owed is causing Longyuan to delay its own payments to steel and cement suppliers, Zhang Li, the company's board secretary, told Reuters, in a ripple effect that is being repeated across the economy.
"If you don't pay me and I pay others, aren't I just a sucker?" said Zhang. "I'm not that stupid."
The details are ugly...
A Thomson Reuters survey of data on China's more than 2,300 stock market-listed firms illustrates the impact on corporate payments, with company receivables - the accounting term for money owed by customers - on average reaching $160.49 million at the end of last year, more than double the $65.9 million average at the end of 2009.
Over the same period, the median collection time for billings crawled up from 71.4 days to 90.42 days. It was the first time China's market-listed firms averaged more than 90 days in a decade.
"It's a pretty loud warning bell," said Paul Gillis, an accounting professor at Peking University's Guanghua School of Management. "Companies cannot pay-off their receivables in a slowing business cycle. Some of these receivable may not get paid, which means you'll see a lot of write-offs in the future."
And even uglier for some industries...
Average collection periods for receivables extended to more than 196 days for electrical equipment makers, 188 days for companies in the building products' sector and more than 171 days for machinery manufacturers, Reuters data shows.
"Credit is tightening, funding costs are higher, and companies are delaying payments," said Ivan Chung, Moody's Investors Service's senior vice president for Greater China credit analysis.
But don't worry - it will all be fixed in 3 to 5 years...
To collect unpaid bills, some Chinese firms are taking the increasingly common - though often fruitless - step of launching lawsuits against deadbeat customers.
Winning a claim in court doesn't necessarily mean a company will collect, especially if the losing firm has gone broke or has had its assets stripped. "It takes one or two years at best, and may take as long as five years," Zhang said.
As we explained previously,
While apologists of China's collapse have been quick to point out that China's credit collapse would be largely a domestic issue, with little foreign creditor exposure at either the public debt, or private - corporate - debt levels, one thing nobody can deny is that if and when Chinese trade routes grind to a halt, the downstream impacts would be devastating, and spread like wildfire as the offshore supply chain is Ice 9'ed.
And sure enough that is what Reuters reports above is happening... which means only one thing...
We explained precisely this a few days ago in "What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?" As briefly noted above, these are all the commodities that serve as conduits in China's numerous Commodity Funding Deals. Only no more.
Which means that far form merely crushing exporters who suddenly are dealing with Chinese importers who have torn apart contracts, obviously with no recourse, suddenly China's entire "hot money" laundering infrastructure (which as explained over the weekend, has gold performing an even greater role than copper) is about to collapse.
And when the counterparties of China's hundreds of billions in CCFDs decide to also get out of Dodge and unwind these deals (amounting to hundreds of billions in notional), only to find the underlying commodity has not only been re-re-rehypotecated countless times and has been sold, then there is truly no way of saying what happens next.
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