China firms slow payments, file lawsuits, as unpaid debt weighs on finances

Wed May 14, 2014 5:00pm EDT

* Money owed to Chinese firms by customers reaches record

* Average collection times for payment also rising

* More write-offs likely as receivables pile up on balance sheets

* Companies putting off payments due to weakening economy

* Real estate among worst affected sectors

By Matthew Miller and Tripti Kalro

BEIJING/BANGALORE, May 15 (Reuters) - As China's economy continues to cool, companies are waiting longer and finding it harder to get paid for goods and services they've already sold, leading to record amounts of receivables - and potential write-offs - on corporate balance sheets.

At Longyuan Construction Group Co, an east China builder of high-rise offices, apartments and highways, receivables last year inched up 4.9 percent to 4.1 billion yuan ($657.3 million), while on average collection times extended to 95.2 days, compared with 76.3 days for 2011.

Slow collection of money owed is causing Longyuan to delay its own payments to steel and cement suppliers, Zhang Li, the company's board secretary, told Reuters, in a ripple effect that is being repeated across the economy.

"If you don't pay me and I pay others, aren't I just a sucker?" said Zhang. "I'm not that stupid."

Growth in China's economy dipped to an 18-month low in the first quarter and may be on track this year for its weakest showing in more than two decades.

Beijing policymakers are moving to put the world's second largest economy on a more sustainable footing less driven by exports and investment, however tightening credit and a faltering real estate market have raised concerns about a sharper-than-anticipated slowdown.

A Thomson Reuters survey of data on China's more than 2,300 stock market-listed firms illustrates the impact on corporate payments, with company receivables - the accounting term for money owed by customers - on average reaching $160.49 million at the end of last year, more than double the $65.9 million average at the end of 2009.

Over the same period, the median collection time for billings crawled up from 71.4 days to 90.42 days. It was the first time China's market-listed firms averaged more than 90 days in a decade.

"It's a pretty loud warning bell," said Paul Gillis, an accounting professor at Peking University's Guanghua School of Management. "Companies cannot pay-off their receivables in a slowing business cycle. Some of these receivable may not get paid, which means you'll see a lot of write-offs in the future."

DISTRESSED REAL ESTATE SECTOR

Reuters News contacted more than 65 firms where receivables are on the rise and interviewed officials at 12 of the companies. Not surprisingly, the worst problems were in the most distressed sectors of the economy, such as real estate.

As a downturn in the property market gathered pace late last year, more than four years after Beijing began introducing a series of cooling measures designed to head off an asset bubble, payments to builders and materials suppliers slowed.

Unpaid bills among construction companies, cement makers and related firms are now creating interlocking, triangular debt that stretches across broader parts of the economy.

China West Construction Co, a small Sichuan-based manufacturer of concrete products distributed mainly in China's northwest, reported net cash flow from operations last year turned negative by 41.76 million yuan, driven by a 23.2 percent jump in accounts receivables, which reached 3 billion yuan. The firm also wrote-off 226.37 million yuan in bad debt, a 23.51 percent rise from a year earlier.

In a statement, the company attributed its problems to a slowing economy along with real estate controls, forcing construction companies to reduce their payments and use notes in lieu of cash. Those include acceptance bills, which guarantee payments only at a future date.

INTER-CONNECTED PROBLEMS

China West's biggest debtor is also the company's largest shareholder, China State Construction Engineering Corp (CSCEC), the country's leading building and real estate conglomerate.

CSCEC, together with at least 17 subsidiaries, owed China West more than 1 billion yuan at the end of December.

Separately, CSCEC reported that its own payables rose last year by 17.7 percent, to 214.95 billion yuan, with outstanding payments to construction-related and real estate development firms comprising more than half of the total.

China West's biggest unpaid supplier was Xinjiang Tianshan Cement Co., which also is a 3.68 percent company shareholder.

Xinjiang Tianshan, in turn, owed payments to several affiliated companies, including 440.1 million yuan to Sinoma International Engineering Co.

Sinoma's biggest shareholder is China National Materials Co , the cement equipment and engineering services behemoth, which also holds a 35.5 percent stake in Xinjiang Tianshan.

The web of cross-ownership among debtors mirrors a similar increase in inter-company loans that has raised the prospect of a wave of defaults in the indebted corporate sector. Chinese companies granted a net 2.55 trillion yuan ($411 billion) in so-called entrusted loans in 2013, nearly double the 1.28 trillion yuan total in 2012.

Average collection periods for receivables extended to more than 196 days for electrical equipment makers, 188 days for companies in the building products' sector and more than 171 days for machinery manufacturers, Reuters data shows.

"Credit is tightening, funding costs are higher, and companies are delaying payments," said Ivan Chung, Moody's Investors Service's senior vice president for Greater China credit analysis.

"While there's rising liquidity pressure, there's still the expectation that these companies eventually will get paid."

LAWSUITS

To collect unpaid bills, some Chinese firms are taking the increasingly common - though often fruitless - step of launching lawsuits against deadbeat customers.

Xiamen Changelight Co, a LED chip maker for the solar industry, filed three lawsuits over the last three years for unpaid bills.

They included a 10.2 million yuan claim against Shenzhen Junduoli Industrial Co, a privately-owned LED maker whose owner allegedly ran off without repaying debts of 90 million yuan, including a 30 million yuan loan to China Construction Bank.

Xiamen Changelight said in its annual report it would file another 12 lawsuits over receivables and damages.

CSCEC Group was involved in more than 1 billion yuan in unsettled lawsuits, including many involving project payments, the company said in its annual report.

At Longyuan Construction, Zhang Li and her colleagues had 13 unsettled lawsuits at the end of last year. One involves a claim of more than 213.7 million yuan against Shanghai Electric Group Co., the power generation and equipment conglomerate.

Winning a claim in court doesn't necessarily mean a company will collect, especially if the losing firm has gone broke or has had its assets stripped. "It takes one or two years at best, and may take as long as five years," Zhang said. ($1 = 6.2375 Chinese Yuan) (Additional reporting by Patturaja Murugaboopathy and the Beijing Newsroom; Editing by Alex Richardson)

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