Business leaders in China may not be familiar with Edmund Blackadder, but they will know what the British character, played by Rowan Atkinson, meant when he said that he felt like a pelican because "whichever way I turn I still have an enormous bill in front of me." Unpaid bills, in the form of accounts receivable, are rising fast in China.
Chinese companies that have so far produced third-quarter updates have seen accounts receivable, or AR, rise on average by 60 per cent over the past year and nearly a third in the last quarter, according to S&P Capital IQ data. There is nothing wrong with that necessarily. AR should grow in line with expanding sales. Trouble is, revenues only grew by a quarter and a 10th, respectively, over the same periods. For seasoned analysts, that would normally set lights flashing red.
Of course, customers always try to delay paying their bills in a downturn. But rising AR relative to sales is the accounting equivalent of increasing hope over reality. And it is hard to say whether companies will be paid because China's credit quality is famously opaque to begin with. The amount of loans turning bad among China's biggest banks are roughly stable. But that has only raised the suspicion that poor bets have been rolled over. Unpaid bills are harder to hide and the rise in AR confirms there is a problem.
China's lack of a tried-and-tested route for settling unpaid claims let alone bankruptcy, will not help those owed. Executives, unsurprisingly, remain sanguine. Sany Heavy, the machinery maker, attributed its 83-per-cent rise in AR in the first nine months (sales flat) to "some deferrals" owing to the economic slowdown. But the risk is that such deferrals will only worsen without a marked economic upturn.