China Racks Up Unpaid Bills

This year, China's economy is on track to see growth fall to a decade low of 8 percent. And the warning signs are all around.

The anticipated 8 percent is still high. The U.S. economy is expected to grow around 2 percent this year. But for China, which has seen an average growth near 10 percent for almost thirty years, this drop is significant.

The most recent sign of the slowdown occurred when Chinese corporations revealed their third quarter financial results.

Unpaid bills, or “accounts receivable,” were at record highs for many companies. Around 66 percent of all listed companies in China reported a rise from last year, an analysis by Financial Times found.

For some, this rise in accounts receivable was worse than for others. First Tractor (HKG: 0038), for example, reported a jump of 169 percent from last year.

Companies like First Tractor were among the most affected. Machinery manufacturers, steel mills, coal and cement companies, and other construction and infrastructure companies were hit the hardest.

Sany Heavy (SHA: 600031) was another such company. This massive machinery maker reported an 83 percent increase in accounts receivable by the end of the third quarter.

Zoomlion (SHE: 000157) reported a 69 percent jump in unpaid bills. Baosteel saw them rise 52 percent. Jiangxi Copper (SHA: 600362) had a 66 percent increase.

The biggest reason seems to be a determination to keep growth high. Companies are just starting to feel the slowdown in the economy.

From CNBC:

Janet Zhang, economist at GaveKal Dragonomics said accounts receivable growth picked up in August and September. “Some enterprises are reluctant to reduce production, so they continue to produce and sell things even when the buyers can't pay the money,” Ms Zhang said. “This is a big difference from 2008, when collapsing demand caused many enterprises to reduce production very significantly.”

Two of the main industries guilty of keeping production high are the metals and coal industries. Steel producers have kept up production despite low demand likely due to the fact that local governments benefit from the revenue.

But there are also positive signs. After all, despite a slight downturn, the economy is still expected to grow at a rapid rate. Some analysts still see the positive.

From CNBC:

“This might be a lagging indicator that will dissipate in coming quarters,” said Frederic Neumann, an economist at HSBC. “The financial situation has eased recently,” he added, citing recently approved new infrastructure projects.

And as far as Chinese banks go, they have so far shown few credit issues. In fact, a number have posted improvements.

But the banks have been less than transparent about these situations, leading some to become suspect about the true state of these banks.

Overdue loans are a growing problem, and some analysts believe banks are actually hiding bad loans from their balance sheets.

This could be the start of a slow ride down for the Chinese economy.

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