China's Latest Problem: Half A Trillion Dollars In Unpaid Bills

Tyler Durden's picture

It’s no secret by now that China has a rather serious debt problem.

Although getting a precise read on it is next to impossible, all told the debt pile probably sums to something like $30 trillion. Various reports put the figure at between 250% and 300% of GDP all-in and as we reported back in January, that may have swelled to more than 340% by the end of 2015.

Corporate debt-to-GDP was around 125% in 2014 and probably sits above 150% now. Depending on what business you’re in, servicing that debt has become all but impossible. As Macquarie discovered last autumn, more than half of all debt for commodities firms was EBIT-uncovered in 2014 and heaven only knows what that figure looks like now.

Things have gotten so bad that in 2015, Chinese firms issued $1.2 trillion in new debt just so they could service their existing loans. In other words, China’s entire corporate sector is quickly becoming one giant ponzi scheme.

“Chinese companies are struggling to generate the cash flow needed to service their obligations,” Bloomberg said last November, summing up the situation in the absolute simplest terms possible.

And it’s only going to get worse. On Sunday we learn that median days sales outstanding for mainland domiciled companies now sits at 83 days - the highest in nearly 17 years and double the average for EM as a whole.

As you can see from the above, it now takes 50% longer for Chinese firms to get paid than it did just five years ago. As you might imagine, the problem is particularly acute for industrial firms who are waiting 131 days to convert sales into cash. "A reading of more than 100 days is typically a red flag," Amy Sunderland, a money manager at Grandeur Peak Global Advisors in Salt Lake City told Bloomberg. 

Yes, Amy it certainly is. Especially considering the median for companies in the MSCI Emerging Markets Index is just 44 days.

"Accounts receivable at the nation’s public firms have swelled by 23 percent over the past two years to about $590 billion, exceeding the annual economic output of Taiwan," Bloomberg goes to write before summing up the situation as follows: "With corporate bankruptcies projected to climb 20 percent this year, more Chinese businesses may be forced to choose between two unpleasant options: keep extending credit to potentially insolvent customers, or cut off the taps and watch sales sink."

Needless to say, this is just another way of looking at the same problem. That is, if I'm an industrial company and you're my customer, and you can't pay me for four months, then I can't service my debt, and thus my loans end up in the special mention bucket at the bank. If you never pay me and there are enough customers like you included in my accounts receivable, then eventually I'm screwed and assuming the Politburo allows it, my loan moves from special mention at the bank to the NPL line.

Unless of course I borrow more money to service my existing debt while simultaneously extending you more credit to "buy" what I'm selling, in which case the entire charade continues for another few months while the amount of leverage embedded in the system grows even larger.

Of course this can only go on for so long. “There is a knock-on effect through the economy,” Fraser Howie, author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise,” tells Bloomberg. “Part of the end game is default and closure.

Right. Because what the chart above suggests is that even healthy companies will start to have working capital problems sooner or later and before long, the proverbial can simply will have been kicked as far into the future as possible and when the breaking point finally comes, every weak hand across the entire supply chain will be shaken out, triggering a cascade of defaults, a resultant banking crisis, and finally, a sharp reduction in excess capacity until the market finally clears. Millions of Chinese will lose their jobs in the process and the PBoC will likely be forced to keep the banks from collapsing, but that's another story.

Meanwhile, on Sunday, PBoC Governor Zhou Xiaochuan warned that China's corporate sector is weighed down by far too much debt. “Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,” he said at the China Development Forum in Beijing. Highly leveraged economies are more susceptible to macroeconomic risks, he added, in a fantastic example of stating the obvious. One does wonder however, if the PBoC was so concerned about excessive debt, how Beijing managed to let the country add a half trillion in TSF during the month of January alone:

One thing that would help, Zhou innocently suggested, is if more savings were channeled into equity markets so that companies could reduce their dependency on debt. "[We need] more robust capital markets," he said. He might have put it another way: "It would be nice if everyone would just pour their savings into equity, that way, companies wouldn't have to take on more debt." 

As FT notes, "about one-third of listed Chinese companies owe at least three times as much in debt as they own in assets, according to figures from Wind."

You'd be forgiven if, upon reading all of the above, you come away feeling a bit uneasy about China's ability to manage this "transition." But really, you shouldn't worry because when it's all said and done, you'll be thanking China for providing the world with a template for how to do something that's absolutely impossible: deleverage and re-leverage at the same time. Here's IMF chief Christine Lagarde: "The world will be watching closely to learn from China as it deftly manages the delicate balance between economic transformation and deeper global integration."

We're not sure about the whole "deftly manages" part, but the world will certainly be "watching closely", that's for sure.

We'll give the final word to Vice Premier Zhang Gaoli: “There will be no systemic risks -- that’s our bottom line."

If you say so.

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SILVERGEDDON's picture

Ho Lee Fuk.

Sum Ting Wong.

Wi Au Leev.

Mo Ni Gon.

knukles's picture

Just weigh bale and ship it out as CLOs and CDO's and Bob's your uncle.  Wait a few years after somebody else takes the hit and start all over again.
Even a first year associate in the mail room at JPM can figure that out.  Jeeesh!

El Oregonian's picture

Simple. Get the Yellen-inkster to start roll'in out those turd-paper machines to start-a-print'in...

Mortimer!!! FIRE 'ER UP!!!

booboo's picture

For Gods sake they have a printer, make moar.

NoPension's picture

.....of course, this can only go on for so long.

Yeah, haha..like forever, it seems.

Slomotrainwreck's picture

It's a good thing they have 10+ Tons of gold to bail themselves out of this unfortunate situation. Good luck with the  SDR thing.

NoDebt's picture

The PBOC should buy Accounts Receivable off corporate balance sheets.  A (very stupid) idea I have suggested to the Fed multiple times without success on ZH.  Maybe China will be the first to take me up on my (very stupid) offer.

It's like QE on sterioids with a multipier effect that they can run then right back up again by instantly selling more shit nobody needs or is will to pay for. 

hooligan2009's picture

you mean like a kind of export credit guarantee by the front door?

Shed Boy's picture

Only half a trillion? Pffffff thats chump change. Merica is way in the lead for debt. In fact we have so much it's one of our greatest exports.

rahtidmon's picture
rahtidmon (not verified) Mar 20, 2016 8:12 PM

Listen to this:

 

https://www.youtube.com/watch?v=ovkTCVa50v4

 

Man Pento is rigtht! Greg is a good guy too.

GRDguy's picture

A whole lot of folks are not going to see their paper promises fulfilled.

No wonder "aunties" put long-term savings into gold and silver.

Dragon HAwk's picture

But debt is Money! everybody is Filthy Fucking Rich, ... Somebody is not gonna get paid of Course and that may cause a few small Problems.

Mini-Me's picture

How long can they string this ponzi along? 

I'm hoping the dominoes fall while Obama is still in office.  I want to see him explain to the American people how either reality is more "peddled fiction" or that the steaming pile of shit he's overseen is somehow someone else's fault.  He's clearly incapable of accepting responsibility for anything.

kiwimail's picture

China isn't the only country with problems. The milk giant Fontera which is New Zealands largest corp has just announced they will be paying their creditors on a 3 month delay. So I suppose the people they owe will pay their creditors on a four month delay.

hooligan2009's picture

RBNZ needs to move to NIRP of around 5% probably, Fonterra would pay faster then, hey? NOT!

Villageidiot777's picture

I bet farmers are really happy about that.

Raden's picture

Fontera's problem is China is there biggest customer ...it's taking them over 3 Months to get paid by there customers

hooligan2009's picture

really?

As FT notes, "about one-third of listed Chinese companies owe at least three times as much in debt as they own in assets, according to figures from Wind."

So, lets get this straight, it's ok to sell American companies to Chinese companies because chinese fiat is better than american fiat?

print money, start companies, blow two thirds of the capital on hookers, blow and casinos, get more fiat money, buy american assets with chinese fiat - get more hookers, blow and place bigger chips at the casinos - because - it just doesn't matter

t-shirts on sale with the motif "PAY NO TAX, PRINT MONEY!" above a photoshopped cackling Draghi and Zhou Xiaochuan (PBoC governor) picture

Bull Bear Nice Pair's picture

With China's growth rate, domestic debt does not matter.

hooligan2009's picture

help me out here - you mean it doesn't matter if you brrow one million bucks and only have $333,333 in assets, because it's a local problem?

last i looked China had printed enough money to buy 1.2 trillion of treasuries, whilst the US government had zero in direct holdings and probably just a few hundred billion in NDF's

http://ticdata.treasury.gov/Publish/mfh.txt

there has to be a reckoning somewhere - otherwise any country could print its own currency and let it's people buy every other countries assets.

this is the part of the issue with currency wars and the "race to de base" (sic - as in debase the currency and get to de base).

Infield_Fly's picture
Infield_Fly (not verified) Bull Bear Nice Pair Mar 21, 2016 6:51 AM

minimum wage protestor paid for by George Soros

assistedliving's picture

just hire Goldman SUcks.  they'll collateralize all that debt, hire your relatives, take a minimal

commission and presto! you've fully joined the international community.  

Yen Cross's picture

   That's okay, the PBoC can just sell some more treasuries, and move those non performing triple re~hypothecated[copper] loans into a bad bank, then twist the paper out on the long end [100+ years] of the bond curve.

  Ohh, fuck me--- The BoJ and ECB already did that. lol

  Better yet--- I fully expect some MOAR unexplained explosions in Eastern China.

Montani Semper Liberi's picture

Meanwhile, the SHCOMP had a good 2.15% pop overnight, Europe is totally green, crude is driving the algos higher in the US futures market , and gold has had a nice $15 waterfall.

 Just a typical Monday morning, no problems here.

yardstick's picture

It's a matter of Stock as well as Flow; under a 'perfect-competition', there's a a lot of inefficiency as companies oversupply, that goes to the heart of the mercantile raison d'etre: liberty to supply the market at any price. And that worked well for developing countries. In Consumer-growth oriented - welfare support is needed - and its a permanent item because it handles Flow. What the West says, is that it would've preferred a more equitable society. ...which China had as part of the the greatleap forward ...that means limiting medium companies to certain forms. As for Construction, clearly there is need for parks and more pemanent stock.