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By October 31, most of the companies listed in China’s A-share market had published their performance for the third quarter. Reports or corporate announcements show that in the third quarter, performances of these companies across the board were less than favorable. Now, people are concerned that the real economy will also slump and, if the downturn is not changed, will impose an adverse impact to the Chinese and world economy.
According to quarterly report figures, the 2,304 companies trading stocks in China’s A-share market generated aggregate sales revenue of 15.99 trillion yuan($2.53 trillion) in the first nine months of 2011, up 24.94 percent compared with the same period last year. During the same period, they reported net profits of 1.49 trillion yuan ($235.76 billion), a year-on-year increase of 18.76 percent, which was a decline of 3.59 percentage points from that in the semi-annual reports. The drop mainly came from the third quarter, when the net profits of listed companies decreased by 6.12 percent to 479.62 billion yuan ($75.89 billion) from 510.97 billion yuan ($80.85 billion) in the second quarter.
Chen Hualiang, an analyst at CITIC Securities Co. Ltd., said profit growth of A-share listed companies, both in the single third quarter and for the first three quarters, is lower than market expectations.
Industries of transportation, ferrous metals and public utilities reported major declines, particularly segmented industries
of water transportation, iron and steel and power. Since iron and steel and power industries are in the upstream of the industrial chains, declines in these industries may indicate China’s industrial vigor is weakening. However, Zhang Xinhong, an analyst at China Securities Co. Ltd., said pessimism isn’t necessary since the decline almost corresponded to the track of macroeconomic operations.
Hurt by the yuan
“The loss on exchange is the major reason for cash losses by listed companies in the third quarter,” said Zhang Haigang, an account manager of CITIC Securities Co. Ltd.
From June 19, 2010, when China’s central bank went ahead with reforming the yuan exchange rate regime, to the end of the third quarter this year, the yuan appreciated by 7.3 percent against the U.S. dollar. The appreciation is particularly steep in the third quarter, reaching 1.76 percent. In this quarter 1,200 listed companies lost 25 billion yuan ($3.96 billion) due to the exchange rate fluctuations.
PetroChina was most affected by the changes, losing 679 million yuan ($107.44 million). ZTE Corp. lost 266 million yuan ($42.09 million) during the first three quarters, compared with 26 million yuan ($4.11 million) last year, pulling the company’s net profits down by 21 percent in the third quarter.
The yuan’s appreciation also increased financial expenses for ZTE. In the third quarter the company reported 1.02 billion yuan($161.39 million) of financial expenses, a year-on-year increase of 1,068 percent.
Financial expenses mainly include net interest expenses, exchange gains or losses, and service charges paid to financial institutions. In the third quarter, the 2,304 listed companies reported aggregate financial expenses of 139.9 billion yuan ($22.14 billion), up 27.8 percent from last year.
“The high financial expenses have become an arduous task in front of numerous listed companies. When they issue their annual reports for 2011, the impact of the yuan’s appreciation will be more common and serious,” said Zhang.
Worse cash flows
According to the quarterly reports, excluding listed financial companies, companies issuing A-shares had a total cash flow of 133.6 billion yuan ($21.14 billion), a drop of 63.27 percent from the figure of $363.7 billion yuan ($57.54 percent) during the same period last year. Of this, 1,261 companies, or 60 percent, had negative cash flows, against
the figure of less than 1,000 in the same period last year.
Zhang said this indicates cash flows of listed companies continue to worsen. As the government tightens control over bank loans, trickling cash flows will make it more difficult for the companies to maintain business growth.
Small and medium-sized enterprises(SMEs) face the worst cash flows. Among the 892 listed companies on the SME board and the growth enterprise board that had published quarterly reports, the cash flows totaled 30.3 billion yuan ($4.79 billion) in the third quarter, down by 81 percent from the figure of 158 billion yuan ($25 billion) in the same period last year.
Real estate companies showed signs of facing capital pressure in their quarterly reports. By the end of the third quarter, the 131 real estate listed companies in the A-share market had reported cash of 191.8 billion yuan ($30.35 billion), with inventories worth 992.2 billion yuan ($156.99 billion). In com- parison, they must repay 441.5 billion yuan($69.86 billion) of debts within one year, including 92.6 billion yuan ($14.65 billion) of short-term loans.
People begin to worry that deteriorating cash flows will get numerous listed companies into “debt chains.” The quarterly reports of listed companies indicated that their funds on account behind in payment totaled 1.84 trillion yuan ($291.14 billion) in the third quarter, a year-on-year increase of 21.05 percent, much higher than the growth speed of their net profits. Of the total, more than 200 companies, most in the coal, cement and real estate industries, had 100-percent increase of their funds on account behind in payment. Moreover, about 20 percent of the listed companies faced slower accounts receivable turnover, which means the speed of collecting bills slows down and payment by the other party delays. If the companies to pay face business difficulties, the problem of“debt chains” among companies—the kind that used to bother Chinese enterprises in the 1990s—is likely to occur again.
Wishful monetary policy
The purchasing manager index (PMI) decreased in October, echoing the slowed business growth for listed companies in the third quarter. According to figures released by China Federation of Logistics and Purchasing (CFLP), in October China’s PMI stood at 50.4 percent, a decline of 0.8 percentage point from the previous month. The index, after a two-month run, dropped again.
The PMI figure issued by the CFLP mainly samples from large and mediumsized enterprises. Yuan Xuya, Director of the Research Institute of Central China Securities Co. Ltd., said the PMI in October showed not only micro-sized and small enterprises faced survival difficulties, but large and medium-sized ones also did.
Zhang said several months ago some private enterprises in Zhejiang and Guangdong provinces went bankrupt and their CEOs disappeared because of excessive debt. Quarterly reports now disclosed the problem of worsening cash flows in listed companies. The government is taking action and the monetary policy may be changed into a“moderately easy” one.
To fight against inflation, China has adopted a tight monetary policy since the second half of 2010. Liquidity was reduced as a result of the measures.
Zhang said today the CPI has dropped. Since food prices, which significantly influence the CPI, may go down because of a bumper harvest of grain and lowering pork prices, it is unlikely to resume the growth momentum in the short term. This provides a good reason to relax the monetary policy.
“Listed companies and other parts of the real economy all hope the government can relax the monetary policy, so that they can solve the difficulty in cash flows,”Zhang said.
Yuan said even though the monetary policy could not be relaxed immediately, the central bank might be more flexible in using monetary tools, such as lowering the deposit reserve rate at a proper time.
According to Yuan, under the situation that most banks are facing low capital adequacy ratios and low core capital adequacy ratios, if the deposit reserve rate isn’t reduced, banks will have no money to lend.
Yuan thought the central bank is likely to do something in the open market operations, which is another tool of the monetary policy. For example, the central bank may properly reduce the speed of drawing back cash from the market, or even input more cash to the market.
According to quarterly report figures, the 2,304 companies trading stocks in China’s A-share market generated aggregate sales revenue of 15.99 trillion yuan($2.53 trillion) in the first nine months of 2011, up 24.94 percent compared with the same period last year. During the same period, they reported net profits of 1.49 trillion yuan ($235.76 billion), a year-on-year increase of 18.76 percent, which was a decline of 3.59 percentage points from that in the semi-annual reports. The drop mainly came from the third quarter, when the net profits of listed companies decreased by 6.12 percent to 479.62 billion yuan ($75.89 billion) from 510.97 billion yuan ($80.85 billion) in the second quarter.
Chen Hualiang, an analyst at CITIC Securities Co. Ltd., said profit growth of A-share listed companies, both in the single third quarter and for the first three quarters, is lower than market expectations.
Industries of transportation, ferrous metals and public utilities reported major declines, particularly segmented industries
of water transportation, iron and steel and power. Since iron and steel and power industries are in the upstream of the industrial chains, declines in these industries may indicate China’s industrial vigor is weakening. However, Zhang Xinhong, an analyst at China Securities Co. Ltd., said pessimism isn’t necessary since the decline almost corresponded to the track of macroeconomic operations.
Hurt by the yuan
“The loss on exchange is the major reason for cash losses by listed companies in the third quarter,” said Zhang Haigang, an account manager of CITIC Securities Co. Ltd.
From June 19, 2010, when China’s central bank went ahead with reforming the yuan exchange rate regime, to the end of the third quarter this year, the yuan appreciated by 7.3 percent against the U.S. dollar. The appreciation is particularly steep in the third quarter, reaching 1.76 percent. In this quarter 1,200 listed companies lost 25 billion yuan ($3.96 billion) due to the exchange rate fluctuations.
PetroChina was most affected by the changes, losing 679 million yuan ($107.44 million). ZTE Corp. lost 266 million yuan ($42.09 million) during the first three quarters, compared with 26 million yuan ($4.11 million) last year, pulling the company’s net profits down by 21 percent in the third quarter.
The yuan’s appreciation also increased financial expenses for ZTE. In the third quarter the company reported 1.02 billion yuan($161.39 million) of financial expenses, a year-on-year increase of 1,068 percent.
Financial expenses mainly include net interest expenses, exchange gains or losses, and service charges paid to financial institutions. In the third quarter, the 2,304 listed companies reported aggregate financial expenses of 139.9 billion yuan ($22.14 billion), up 27.8 percent from last year.
“The high financial expenses have become an arduous task in front of numerous listed companies. When they issue their annual reports for 2011, the impact of the yuan’s appreciation will be more common and serious,” said Zhang.
Worse cash flows
According to the quarterly reports, excluding listed financial companies, companies issuing A-shares had a total cash flow of 133.6 billion yuan ($21.14 billion), a drop of 63.27 percent from the figure of $363.7 billion yuan ($57.54 percent) during the same period last year. Of this, 1,261 companies, or 60 percent, had negative cash flows, against
the figure of less than 1,000 in the same period last year.
Zhang said this indicates cash flows of listed companies continue to worsen. As the government tightens control over bank loans, trickling cash flows will make it more difficult for the companies to maintain business growth.
Small and medium-sized enterprises(SMEs) face the worst cash flows. Among the 892 listed companies on the SME board and the growth enterprise board that had published quarterly reports, the cash flows totaled 30.3 billion yuan ($4.79 billion) in the third quarter, down by 81 percent from the figure of 158 billion yuan ($25 billion) in the same period last year.
Real estate companies showed signs of facing capital pressure in their quarterly reports. By the end of the third quarter, the 131 real estate listed companies in the A-share market had reported cash of 191.8 billion yuan ($30.35 billion), with inventories worth 992.2 billion yuan ($156.99 billion). In com- parison, they must repay 441.5 billion yuan($69.86 billion) of debts within one year, including 92.6 billion yuan ($14.65 billion) of short-term loans.
People begin to worry that deteriorating cash flows will get numerous listed companies into “debt chains.” The quarterly reports of listed companies indicated that their funds on account behind in payment totaled 1.84 trillion yuan ($291.14 billion) in the third quarter, a year-on-year increase of 21.05 percent, much higher than the growth speed of their net profits. Of the total, more than 200 companies, most in the coal, cement and real estate industries, had 100-percent increase of their funds on account behind in payment. Moreover, about 20 percent of the listed companies faced slower accounts receivable turnover, which means the speed of collecting bills slows down and payment by the other party delays. If the companies to pay face business difficulties, the problem of“debt chains” among companies—the kind that used to bother Chinese enterprises in the 1990s—is likely to occur again.
Wishful monetary policy
The purchasing manager index (PMI) decreased in October, echoing the slowed business growth for listed companies in the third quarter. According to figures released by China Federation of Logistics and Purchasing (CFLP), in October China’s PMI stood at 50.4 percent, a decline of 0.8 percentage point from the previous month. The index, after a two-month run, dropped again.
The PMI figure issued by the CFLP mainly samples from large and mediumsized enterprises. Yuan Xuya, Director of the Research Institute of Central China Securities Co. Ltd., said the PMI in October showed not only micro-sized and small enterprises faced survival difficulties, but large and medium-sized ones also did.
Zhang said several months ago some private enterprises in Zhejiang and Guangdong provinces went bankrupt and their CEOs disappeared because of excessive debt. Quarterly reports now disclosed the problem of worsening cash flows in listed companies. The government is taking action and the monetary policy may be changed into a“moderately easy” one.
To fight against inflation, China has adopted a tight monetary policy since the second half of 2010. Liquidity was reduced as a result of the measures.
Zhang said today the CPI has dropped. Since food prices, which significantly influence the CPI, may go down because of a bumper harvest of grain and lowering pork prices, it is unlikely to resume the growth momentum in the short term. This provides a good reason to relax the monetary policy.
“Listed companies and other parts of the real economy all hope the government can relax the monetary policy, so that they can solve the difficulty in cash flows,”Zhang said.
Yuan said even though the monetary policy could not be relaxed immediately, the central bank might be more flexible in using monetary tools, such as lowering the deposit reserve rate at a proper time.
According to Yuan, under the situation that most banks are facing low capital adequacy ratios and low core capital adequacy ratios, if the deposit reserve rate isn’t reduced, banks will have no money to lend.
Yuan thought the central bank is likely to do something in the open market operations, which is another tool of the monetary policy. For example, the central bank may properly reduce the speed of drawing back cash from the market, or even input more cash to the market.