Gavekal Capital: Unbelievably, Chinese Companies Massively Increased Leverage Ratios in 2014 to Highest Ever

Thursday, April 23, 2015

Unbelievably, Chinese Companies Massively Increased Leverage Ratios in 2014 to Highest Ever

Not to take anything away from what has become a bona fide bull market in China, but we have been pretty skeptical that the rally in domestic Chinese shares has anything to do with corporate fundamentals. It more likely has to do with central bank stimulus. And a review of the most recent financial statistics on the CSI 300 reinforces our view because Chinese companies have never, ever been more levered.

The below table shows various financial statement ratios in aggregate for the CSI 300 excluding all financial and utility companies. Here are a few highlights:

  1. Total liabilities as a percent of equity increased by 14% to 162%, an 80% increase since 2002
  2. Financial leverage increase to 2.7x, a 42% increase since 2002
  3. Inventories increased again as a percent of total capital and sales
  4. Inventories as a percent of total capital have increased 105% since 2002
  5. Net profit margin and cash flow from operations margin remained near the decade lows

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Just when you thought Chinese companies couldn't get more levered, they have, and now it's in the face of a rather noticeable deterioration in the domestic economic situation.