Western multinational companies (MNCs) might be struggling with tight liquidity, but many mainland Chinese companies have easier access to liquidity and have largely avoided such constraints. According to Fergal Power, a partner at KPMG China’s restructuring and cash management advisory, global studies show that cash is a tier-one priority for MNCs, but far less so in China given the greater availability of capital.
Accordingly, more financing from banks has led to reduced focus on working capital management among Chinese companies -- a trend that runs contrary to the global focus on liquidity. “One of the things we found was that while globally most businesses are focused on collections and trying to increase their payable terms, working capital levels in China have increased,” said Power.
While this is not seen as a major weakness on balance sheets yet, mainland companies would do well to watch this space. “It is fair to say that improved working capital management will become a greater focus and importance to Chinese domestic firms as interest rates rise and liquidity becomes harder to access,” said Power.
Recent events would seem to support this. Christmas Day’s benchmark interest rate hike by the People’s Bank of China just might be an indication that tighter liquidity will be with us sooner rather than later. The Chinese central bank’s 25 basis point hike in one-year base lending and deposit rates, taking them to 5.81% and 2.75% respectively, followed October’s rate hike which was the first hike in almost three years.
“As interest rates increase, there will be increased pressure on cashflow,” said Power. “[Companies] will have to start looking at how they need to improve their cashflow. Working capital management improvement is going to present a great opportunity for them to do this.”
Power believes that most Chinese companies are conscious of the role that cash and working capital management plays in their business operations; the question is the level of strategic importance that they place on these issues. “Most industry analysis we do suggests that Chinese corporates often lag behind international best practice in terms of working capital averages. That’s not to say that they are badly managed; just to say that they may have real opportunities for improvement and savings.”
A first step would be for companies to benchmark themselves against industry peers to give a first-level indicator as to how well they are managing cash and working capital. If a company then believes that it is below average in these areas, it can try and address this by implementing a working capital improvement plan.
However, implementing a working capital improvement plan takes an awful lot of effort -- such programmes “are not just for Christmas, they have to be made for life”, said Power. But they do result in a more disciplined focus on cash which delivers profit and value to the bottom line. “There’s a correlation between working capital improvements and the value of a company,” noted Power. And recent events suggest that this could quickly become of far greater interest to Chinese firms.