Chinese Corporate Balance Sheets Are the Most Levered They Have Ever Been

One of the most interesting annual activities we undertake is a top down examination of Chinese corporate balance sheets. Why is it interesting? Because every year we are surprised by their almost systematic deterioration, and 2013 was no exception. In the below table we aggregate financial statements for all non-financial, non-utility constituents of the CSI 300 index and then calculate relevant financial ratios through time to understand how they are evolving. Here are the highlights:

• Total liabilities as a % of equity remained at a record high
• Net debt as a % of equity increased by 5% to a record
• Financial leverage increased again to a record
• Non-financial working capital as a % of total capital (a measure of working capital accumulation (lower is better)) fell, but it still near the record high
• Inventories as a % of total capital fell, but remain near the record high
• Accounts receivable, accounts payable and inventories all remain near record highs (i.e. corporates are still "stuffing the channel" to finance sales)

Meanwhile, the net profit margin fell to a record low and the cash flow margin rose but is just slightly above the decade low. These measures are 1/2 to 1/3 of their level of 10 years ago. Once again we have more leverage and less margin for error.