World Economy

China Firms Reluctant to Invest

China Firms Reluctant to Invest China Firms Reluctant to Invest

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% 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 US, 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% from double-digit levels just a few years ago, the change in mindset has been stark.

“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.

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 three trillion yuan ($452.7 billion) of maturing onshore debt in the second half, data compiled by Bloomberg show.

China isn’t the only country with a hoarding problem. Companies in Japan boosted cash holdings to a record last year, a sign they are unconvinced that fiscal and monetary stimulus will revive growth in Asia’s second-largest economy.

  Services Sector Slows

China’s services sector, now the largest part of the economy, is slowing.

The latest Caxin-Markit services purchasing managers’ index fell by one point to 51.7 in July, indicating that growth in the sector slowed modestly compared to levels seen in June, Business Insider reported.

According to Markit, all of the PMI’s sub indices showed signs of deterioration in July, with employment falling back into the territory of contraction after three consecutive months of growth.

The slowdown recorded in the Caixin-Markit survey is at odds with the official non-manufacturing PMI report, released by the Chinese government, which revealed activity levels accelerated sharply over the same period. It rose to 53.9 from 53.7 in June, leaving it at the highest level seen since December last year.

  Monetary Easing

China’s top economic planner pledged to reduce companies’ financing costs by cutting interest rates as downward pressure on economic growth increases, MarketWatch reported.

Decision makers will lower benchmark interest rates and banks’ reserve requirement ratio at appropriate times, the research department of the National Development and Reform Commission said in a statement on its website Wednesday.

The government will work at easing financing difficulties faced by private firms by setting up government-led guarantee firms, the NDRC said.

The planning agency also said the government will offer more incentives for home buyers, such as subsidies, in some cities to help sell new homes.

An official gauge of the country’s factory activity showed a contraction for the first time in five months. China’s official manufacturing purchasing managers index edged down to 49.9 in July from June’s 50, a mark that separates expansion from contraction, official data showed Monday.