Pay us later
Corporate China appears to be beating the country’s lenders at their own game. Even as banks heap credit into China’s economy to keep its credit-fuelled growth from crashing, companies are handing out credit to their own customers. That may help keep the economy revving, but the risk is that past-due bills make it harder for companies to service mounting debt.
Loans from China’s banks have been growing at roughly 16 percent a year. Expanding credit helps to mitigate slowing growth. But extending credit when business opportunities are declining can be like throwing good money after bad, as lenders let indebted companies pay off old loans with new ones rather than allow them to fail. The result is the kind of deflationary downturn Japan has experienced, where refinancing crowds out new investment.
China’s companies are extending credit to their customers at an even quicker rate. Receivables at companies listed on Shanghai’s stock exchange now amount to roughly $190 billion, equivalent to 30 percent of all bank lending, with over half of those outstanding bills owed to just 60 state-controlled companies. Receivables at these firms have been climbing at roughly 30 percent a year for the past four quarters, while the length of time companies are lending to customers has climbed from about 33 days a year ago to 41 days. China Shipbuilding’s receivables have climbed 50 percent in the past year. China Merchants Property’s receivables have doubled.
A receivable represents a zero-interest loan, and the amount of credit a company extends to customers usually rises when times are good and falls when the outlook is uncertain. If companies fail to rein in customer credit, the risk is that unpaid bills force otherwise healthy companies to default on their own loans. This so-called triangular debt deepened Asia’s financial crisis in 1997 and 1998.
It’s a troubling sign, therefore, when companies extend credit terms in tough times. It suggests that they believe money earned tomorrow will be worth more than money earned today, or in other words, deflation. That helps explain why the average listed Japanese company waits 96 days for repayment. Increasingly generous corporate credit may be another ill omen for China’s economy.