Understanding China, One Blog at a Time

An American in China

Chinese Companies Are Bleeding Cash

Posted by w_thames_the_d on July 24, 2013

Uncle chicom doles out cash to Chinese firms like Bobby B’s dealer dishes out crack. The only difference is that Bobby B usually can pay for his fix.


Using DuPont analysis, a common tool employed by analysts which breaks down ROE into separate parts, shows other worrying increases in pressure for China’s corporate sector.

“Chinese corporate margins have been on the decline for more than a decade and this clearly shows the focus on quantity versus quality, or to put it another way volume at the cost of margins,” said Desh Peramunetilleke, head of microstrategy at CLSA in Hong Kong. “Chinese corporates do not have the pricing power even when the Chinese GDP growth has been so strong in the past.”

Other measures also point to growing stress. Profit margins fell to 10.5% in 2012 compared to 15.6% in 2007, extending a downtrend that has been underway since the beginning of 2000 when margins were 18.4%.

In addition, debt accounted for an increasing portion of the returns generated by Chinese companies, the study said.

The final piece of the jigsaw is asset turnover, which measures how effectively a company can utilize its assets to create revenues. This metric increased as the economy grew rapidly in the boom years, which in effect allowed for companies to expand haphazardly – especially state-owned enterprises.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: