In one of the bleakest ever springs in China, thousands of companies closed down. A larger number are still churning their cash flow and waiting for a rebound of consumer sentiment.
The retail sector has been the most heavily impacted industry due to Covid-19. However, as China disallows suspension of payroll expenses, corporates across different industries are facing a humongous cash outflow during the outbreak with zero revenue.
Xibei, a restaurant chain with more than 400 restaurants in over 60 cities in China, was reported in early February to have a cash position, even with loans granted from banks, that could only cover salaries for three months. HNA group, with multiple businesses, including in airlines, hospitality and tourism, is now in financial distress due to the current coronavirus outbreak. The company announced on February 29 that a working group led by the Hainan Provincial Government has been established to resolve the group’s financial difficulties.
With pressure from revenue shrink, surviving the unpresented public health emergency has become the top priority for many Chinese corporates, and corporate treasurers are advised to maintain a healthy level of cash position in their balance sheet and avoid unnecessary expenses or investment.
“Corporate treasurers need to make sure that they have sufficient funds to pay salaries, tax and utility bills, etc. Ensuring cash is secure and making sure that it is liquid and accessible is the number one priority, as compared with maximizing returns – especially during periods of uncertainty,” says Aidan Shevlin, head of Asia Pacific Liquidity Fund Management, at J.P. Morgan Asset Management.
A recent report from S&P Global Ratings says that liquidity will be an issue for at least the first half of the year. Corporates with high operating leverage, concentrated short-term maturities, and poor liquidity management will be hit harder. Private-owned enterprises (POEs) are also more vulnerable due to their poor access to funding channels as they face a more challenging operating environment.
According to S&P Global Ratings, among all sectors, information technology, consumer, and retail and leisure are expected to have more liquidity issues, and also mostly rely on operating cash inflow as a source of liquidity. These sectors may have to face stretched liquidity during this period.
The outbreak of Covid-19 has put pressure on China’s manufacturing industry. As the world’s factory and key country in the global supply chain, China has seen the lowest manufacturing PMI over the past 12 years, standing at 35.7% in February.
Due to slower production and slower component shipment from domestic and overseas suppliers, Chinese smartphone makers such as Xiaomi and Huawei are facing challenges in launching new flagship smartphones in 2020. Yet, with healthy balance sheets and flexible financing channels, the leading players are unlikely to see liquidity issues in the short run.
As of September 30 2019, Xiaomi reported a 35.6-billion-yuan cash and cash equivalent on its balance sheet. In addition, the company has applied for a 5-billion-yuan term loan from Chinese banks for coronavirus related business and production.
On the other hand, global MNCs in China with cross-border cash pools set up are also able to remit the offshore funds into China as an alternative funding source.
In March 2019, the State Administration of Foreign Exchange (SAFE) announced new Administrative Provisions on Centralized Cross-border Fund Management for Multinational Companies (Circular 7, which includes additional amendments to the scheme. The upgraded scheme now increases the foreign debt quota of multinational companies’ domestic participating members and allows for renminbi to be the account currency for Domestic Master Accounts. The leading entity can borrow renminbi from its overseas intercompany as an alternative fund source for their China business.
A Hong Kong headquartered logistics company recently told The Asset that its corporate treasury centre has already financed its mainland entities to ensure their liquidity through inter-company loans.
“In addition to our parent support, our company is also looking to utilize the unused credit limit from our existing local banking partners. They are also happy to provide the liquidity support to us,” says the Beijing-based funding controller at the logistics company.
“Maintaining a good relationship with banks and having all cash structures in place helped us to avoid liquidity shortage.”
Slower property sales
Real estate has been regarded as one of the most GDP-contributing sectors in China. It is also the most heavily indebted industry which relies on continuous sales growth to maintain market share and viable sustainable financing channels.
“We anticipate that China’s residential property sales could fall by 5%-10% in 2020, in a baseline test scenario where new coronavirus cases peak in March,” says S&P Global Rating credit analyst Christopher Yip. “Residential property sales have all but stalled and will likely remain dismal for the coming weeks, with sales centres shut or empty.”
As property sales are likely to drop significantly, treasurers and CFOs at Chinese property developers need to come up with bold ideas to offset the short-term cash flow shortage.
China Evergrande, the third largest property developer in China, announced a 25% discount on all of its properties in February. The company reported an 83.5% debt ratio, with 75% of its total debt to mature in two years’ time in its interim report in 2019.
Yet, the good thing is, the door of the offshore capital market is still open for Chinese property developers who are actively looking for refinancing. According to Moody’s, its rated developers issued US$16.5 billion of offshore bonds in January 2020, compared with an average monthly issuance of US$5.8 billion in 2019. These new issuances enhanced the developers’ liquidity and debt maturity profile.
In the onshore market, on March 1, China’s National Development and Reform Commission (NDRC) and China Securities Regulatory Commission (CSRC) announced the transformation of domestic bond issuance to a registration system, from an approval system, effective the same day. The new system will facilitate developers’ access to onshore funding, particularly for developers facing high refinancing needs in the next six to 12 months.
“Though 2020 will face challenges from the coronavirus outbreak in the short term, the medium- to long-term positive prospects for China’s property market remain unchanged. The Group will adhere to the purpose of achieving high-quality and steady development and constantly strive to create value for shareholders,” says Zhaoyuan Lin, chairman of Yuexiu Property in its annual result press conference.
On February 17, PBoC announced to cut its MLF by 10bp. On February 20, the loan prime rate (LPR) was thereafter adjusted down by 10bp.
“The recent MLF cut from PBoC will have an impact on the LPR, which straight away benefits companies in China as it lowers their funding cost,” Shevlin notes.
On February 7, Xibei secured a 430-million-yuan credit facility from Shanghai Pudong Development Bank. Leading Chinese hotpot brand Haidilao also obtained a 2.1-billion-yuan credit facility from Citic Bank and Baixin Bank.
To further reduce burdens for corporates, Beijing has announced to waive the mandatory social security fund payment to all SMEs for no longer than five months. Large corporates are also allowed to pay only half of the security fund for no longer than three months.
“The State Tax Administration will make 100% efforts to ensure the policy will benefit all corporates in China,” says the deputy commissioner at The State Tax Administration.
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