SOE: State of Emergency?

Cash-crunch at state firms?

Beijing Nine Star Technology is having a problem with customers not paying their bills. The provider of business management platforms started to notice an increase in its accounts receivable in April and May. Since then, more of its clients have failed to cough up.

What makes Nine Star’s situation notable is that most of its clients are central enterprises, the elite group of some of China’s largest state-owned businesses.

“The amount of money is not large,” Xie Hongbo, Nine Star’s general manager, told CBN. “But we found that the central enterprises began to default, so we believe that this reflects a tightening in their funds.”

He’s right. The slowness of the SOEs in paying their bills is probably an outcome of a tougher environment for the state sector. The payment freeze could be a sign that local governments are unable to pay the SOEs they have hired to build infrastructure projects. But it does not give the full picture. The cost of labour, raw materials and debt is climbing steadily. This could bode ill for China’s economic outlook: despite all the talk about the growth of the private sector, the public sector remains a key force in the national economy.

One reason why SOEs are slow to pay is that many are also waiting on their money. Central enterprises reported aggregate accounts receivable of Rmb1 trillion ($156 billion) in the first half of the year, more than 10% of their total revenue, according to figures from Sasac, the government body that manages the central enterprises (see WiC45). This compares to an average of 6.4% of accounts receivable for listed companies in 2009.

In recent weeks, media coverage of the struggle to survive has tended to focus on small-and-medium enterprises. But the larger firms are not immune to the effects of inflation: the increasing costs of both labour and raw materials has pushed up the cost of business by 25% in the first half of the year, says CBN. Although recent price corrections offer slightly better news, SOEs reliant on purchases of commodities have been particularly exposed.

The cost of borrowing has also become more expensive, pushing central enterprise interest payments up by 30% in the first six months of 2011.

And that’s just for pre-existing debt. Getting a loan has become much harder: “Although central enterprises are still the largest customers of the commercial banks, bank funds are beginning to dry up, so a steady stream of cash, as in the past, is impossible,” Zhao Qingming, an analyst at China Construction Bank.

The troubles facing the large SOEs will be of no surprise to some. Three years ago, Li Rongrong, then head of SASAC, told company heads to prepare for a period of austerity. But the launch of the Rmb4 trillion stimulus programme in November 2008 to fight the financial crisis seemed to prove Li wrong, as government spending prompted SOEs to build up capacity.

Now that the economy is slowing down, swollen SOEs will have to start dealing with the inevitable hangover.

It is less obvious when the environment will become more conducive for large SOEs to start growing more quickly again. “The most direct positive for central enterprises is when the state launches large projects, but this year we do not see these kind of policies,” Zhu Boshan of Shanghai Tacter Consulting told the Economic Observer.

But despite the worsening environment, recent results suggest profitability still seems buoyant enough. In the first seven months of 2011, the combined net profits of China’s SOEs increased 24% from a year earlier.

In July, profits dropped by 5%. Managers in Beijing will be hoping that this isn’t the start of a downward spiral.

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