China Economy

Chinese firms hoarding billions in cash they’re too afraid to invest as economy slows, say analysts

Lack of confidence in markets and limited investment opportunities means firms are sitting on money rather than putting it to work, according to observers

PUBLISHED : Wednesday, 03 August, 2016, 10:25am
UPDATED : Wednesday, 03 August, 2016, 10:43pm

Never before have China’s companies had so much cash and so little to spend it on.

With investment opportunities sparse amid the country’s weakest economic expansion in a quarter century, Chinese firms reported an 18 per cent jump in cash holdings during their latest quarter, the biggest increase in six years.

The US$1.2 trillion stockpile, which excludes banks and brokerages, grew at a faster pace than in the US, Europe and Japan, according to data compiled by Bloomberg.

While there are worse problems than having too much cash, China Inc’s unprecedented hoard is frustrating both policy makers and investors.

What is crippling China’s once powerful export machine?

Because companies lack the confidence to spend on new projects, government attempts to boost growth by pumping money into the financial system are falling short.

Stockholders, meanwhile, would rather see bigger dividends or share buybacks than a buildup of idle cash on corporate balance sheets.

“This is actually becoming a bigger and bigger issue,” said Herald van der Linde, the Hong-Kong based head of Asia-Pacific equity strategy at HSBC Holdings. “Cash is becoming a point of debate.”

The impulse to hoard instead of invest is relatively new for a country where corporate risk-taking has been rewarded for much of the past 25 years. But as economic growth moves deeper below seven per cent from double-digit levels just a few years ago, the change in mindset has been stark.

Growth in China’s private spending on fixed assets, which topped 10 per cent last year, slowed to 2.8 per cent in the six months through June, the weakest level on record.

“The drivers aren’t there” for Chinese firms to invest, said Sean Taylor, chief investment officer for the Asia-Pacific region at Deutsche Asset Management in Hong Kong, which oversees about US$803 billion globally.

Not all Chinese companies are sitting on too much cash. Some don’t have enough, as reflected in an unprecedented 17 defaults in the country’s onshore corporate bond market so far this year, more than double the tally for all of 2015. 

China has a boom in ‘get rich quick’ schemes, instead of the economic reform it needs

Firms in so-called old economy sectors, including industrial, energy and materials companies, have had the most difficulty growing their cash balances, while new economy businesses in the consumer and technology industries have seen their stockpiles swell.

Some of the cash buildup may reflect worries among corporate executives that refinancing debt will become more difficult as the economy slows. Chinese firms face a record 3 trillion yuan (HK$3.5 trillion) of maturing onshore debt in the second half, data compiled by Bloomberg show.

The government is trying very hard to push the economy through investment, but the private side isn’t responding. They’re not very confident
Francis Cheung, financial analyst

“For highly geared companies, that is a very good reason to be cautious,” said Alex Wong, who helps oversee about US$100 million at Ample Capital in Hong Kong. “It’s difficult to raise new funds as the stock market is bad right now and the bond market isn’t that good either.“

China isn’t the only country with a hoarding problem. Companies in Japan boosted cash holdings to a record last year, a sign they are unconvinced that fiscal and monetary stimulus will revive growth in Asia’s second-largest economy.

Yet the pace of accumulation in China stands out. The nation’s 18 per cent quarter-on-quarter increase in cash and equivalents compares with gains of about 13 per cent in Japan, five per cent in the US and one per cent in Europe, data compiled by Bloomberg show.

If Chinese policy makers had their way, companies would be putting that money to work instead. Despite state efforts to spur growth with 9.8 trillion yuan of new aggregate financing this year, the country’s official manufacturing gauge is still signalling a contraction while the services sector is expanding at a slower pace than its five-year average.

The government has been forced to pick up the slack, with state firms boosting fixed-asset investment by more than 23 per cent this year through June versus the same period in 2015.

“The government is trying very hard to push the economy through investment, but the private side isn’t responding,” said Francis Cheung, the head of China and Hong Kong strategy at CLSA in Hong Kong. “They’re not very confident.”

China firms ranked worst out of businesses in emerging market nations: global anti-graft watchdog survey

If healthy Chinese companies can’t find promising projects, they should return cash to stockholders, according to Ronald Wan, chief executive of Partners Capital International in Hong Kong.

Increased dividends may be one way to appease investors. Excluding banks, firms domiciled in China have an average estimated dividend yield of just 1.6 per cent for the next 12 months, versus about 2.7 per cent for non-lenders in the MSCI Asia Pacific Index.

“If it becomes a trend for companies to keep all the cash and not distribute it to shareholders, it will create concerns about the attractiveness of mainland shares,“ Wan said. “I can see the reasons behind it, but of course investors won’t like it.”