Chinese Corporates Brace For Rising Annual Losses

Amid a sluggish economy and rising debts, China’s corporations are bracing for losses and drops in asset values, The Wall Street Journal (WSJ) said on Friday (Feb. 1).

Nearly 400 publicly listed companies have revealed that they anticipate record net losses for 2018, the publication said, marking the largest collective annual losses since 2009 — totaling between $43.1 billion and as much as $49.7 billion. That compares to 2017 losses, during which 225 companies in China reported combined annual losses of $18.53 billion.

“A lot of companies paid excessively high premiums for their takeover targets, and these assets no longer look worth that much now,” said Soochow Securities Co. Analyst Deng Wenyuan in an interview with the publication. Reports added that revenue declines and rising costs are combining with asset write-downs and an overall weakening economy to result in these losses.

An acquisitions wave that lasted through the middle of 2015 was cited by the publication as one of the trends now “causing trouble” for Chinese conglomerates. Unofficial regulatory requirements in China have businesses reporting to authorities whether their acquisitions have been successful three years after completion, so deals completed in 2015 are leading to goodwill impairments today, reports added.

“The economic slowdown and trade tensions in the U.S. are certainly the main factors, but the wave of goodwill impairments also played a key role in the losses,” said Central China Securities Senior Analyst Zhang Gang.

Zheshang Securities Co. analysis found that 277 companies have revealed goodwill impairments in 2018 worth an average of 46 percent of net assets, according to reports, though analysts said they expect the number of companies announcing goodwill write-downs to rise.

Meanwhile, previous reports in the Financial Times have pointed to the financial struggles of China’s private sector as well. Analysts said current market conditions are likely to initiate a wave of corporate bond defaults, which could top the $22.3 billion in defaults recorded last year.

Last year, Fitch analysts warned that regulatory efforts to reduce corporate debt levels could have a negative impact on China’s overall economy.