Never before have China’s companies had so much cash and so little to spend it on.
With investment opportunities sparse amid the country’s weakest economic expansion in a quarter century, Chinese firms reported an 18 percent jump in cash holdings during their latest quarter, the biggest increase in six years. The $1.2 trillion stockpile — which excludes banks and brokerages — grew at a faster pace than in the U.S., Europe and Japan, according to data compiled by Bloomberg.
While there are worse problems than having too much cash, China Inc.’s unprecedented hoard is frustrating both policy makers and investors. Because companies lack the confidence to spend on new projects, government attempts to boost growth by pumping money into the financial system are falling short. Stockholders, meanwhile, would rather see bigger dividends or share buybacks than a buildup of idle cash on corporate balance sheets.
“This is actually becoming a bigger and bigger issue,” said Herald van der Linde, the Hong Kong-based head of Asia Pacific equity strategy at HSBC Holdings. “Cash is becoming a point of debate.”
The impulse to hoard instead of invest is relatively new for a country where corporate risk-taking has been rewarded for much of the past 25 years. But as economic growth moves deeper below 7 percent from double-digit levels just a few years ago, the change in mindset has been stark. Growth in China’s private spending on fixed assets, which topped 10 percent last year, slowed to 2.8 percent in the six months through June, the weakest level on record.
“The drivers aren’t there” for Chinese firms to invest, said Sean Taylor, chief investment officer for the Asia Pacific region at Deutsche Asset Management in Hong Kong, which oversees about $803 billion globally.
Not all Chinese companies are sitting on too much cash. Some don’t have enough, as reflected in an unprecedented 17 defaults in the country’s onshore corporate bond market so far this year, more than double the tally for all of 2015. Firms in so-called old economy sectors — including industrial, energy and materials companies — have had the most difficulty growing their cash balances, while new economy businesses in the consumer and technology industries have seen their stockpiles swell.
Some of the cash buildup may reflect worries among corporate executives that refinancing debt will become more difficult as the economy slows. Chinese firms face a record 3 trillion yuan ($452 billion) of maturing onshore debt in the second half, data compiled by Bloomberg show.
“For highly geared companies, that is a very good reason to be cautious,” said Alex Wong, who helps oversee about $100 million at Ample Capital in Hong Kong. “It’s difficult to raise new funds as the stock market is bad right now and the bond market isn’t that good either.”
China isn’t the only country with a hoarding problem. Companies in Japan boosted cash holdings to a record last year, a sign they’re unconvinced that fiscal and monetary stimulus will revive growth in Asia’s second-largest economy.
Yet the pace of accumulation in China stands out. The nation’s 18 percent quarter-on-quarter increase in cash and equivalents compares with gains of about 13 percent in Japan, 5 percent in the U.S. and 1 percent in Europe, data compiled by Bloomberg show.
If Chinese policymakers had their way, companies would be putting that money to work instead. Despite state efforts to spur growth with 9.8 trillion yuan of new aggregate financing this year, the country’s official manufacturing gauge is still signaling a contraction while the services sector is expanding at a slower pace than its five-year average. The government has been forced to pick up the slack, with state firms boosting fixed-asset investment by more than 23 percent this year through June versus the same period in 2015.
“The government is trying very hard to push the economy through investment, but the private side isn’t responding,” said Francis Cheung, the head of China and Hong Kong strategy at CLSA in Hong Kong. “They’re not very confident.”
If healthy Chinese companies can’t find promising projects, they should return cash to stockholders, according to Ronald Wan, chief executive of Partners Capital International in Hong Kong.
Increased dividends may be one way to appease investors. Excluding banks, firms domiciled in China have an average estimated dividend yield of just 1.6 percent for the next 12 months, versus about 2.7 percent for non-lenders in the MSCI Asia Pacific Index.
“If it becomes a trend for companies to keep all the cash and not distribute it to shareholders, it will create concerns about the attractiveness of mainland shares,” Wan said. “I can see the reasons behind it, but of course investors won’t like it.”