• Anti-graft campaign hits commercial sector
• Deal-making slows as executives keep heads down
• Corruption probe bad news for company tight on cash flow
By Pauline Loong
China’s corruption watchdog has a website that attracts up to two million page views a day. Prurient interest is one reason for its popularity. Fear for self and family and friends is another.
But the bigger motivation for businesses and investors is to keep track of who is about to be thrown into the government’s corruption meat grinder so as to stay one step ahead of any commercial fallout.
The anti-graft campaign has been showing signs of moving beyond party cleansing into something of an audit of the commercial sector – including private businesses vulnerable to a sudden credit squeeze.
Corruption investigations are never just about one man. In China’s pay-to-play business culture, bribes involving big bucks are almost always inextricably linked to flaws in the system involving political patronage and powerful vested interests.
When a top executive falls, he typically brings down all around him. In the rare, best-case scenario, the impact on the company is confined to personnel issues. The popular joke is that big companies need to have contingency plans to fill vacancies left after an inspection by the corruption watchdog to keep the business running.
CNPC, which is at the centre of the biggest corruption probe into the state sector in years, is even said to have a rule requiring its middle to top-tier managers to report to their department heads daily. Anyone who does not do so is considered “gone” and will be replaced the next day by a pre-approved successor.
But more typically, the arrest of a chief executive or even rumours of such a possibility hurt the bottom line. Deals are frozen or fall through altogether as people opt to keep their heads down for fear of attracting unwanted attention. Private companies are driven to the wall as credit lines are pulled. And stock market listed entities find themselves facing shareholder lawsuits on top of their other legal troubles.
Average profit margins have declined in China's healthcare sector. Photo: iStock
The healthcare sector is among the most visibly affected. The industry had enjoyed easy growth in China for years. But the average profit margins declined to around 10 percent in 2013 from 15 percent in 2012 while average net profits fell 2.1 percent from close to 20 percent growth in previous years, according to an analysis of more than 60 listed Chinese healthcare firms by the news agency Reuters.
This is unsurprising given the current fearful climate. The industry’s sales representatives say they are finding it hard to even get a meeting with doctors who fear it might invite the watchdog’s scrutiny. And then there is the inevitable pressure on operating cash flow as banks typically withhold short-term credit lines and suppliers withdraw credit to companies in the private sector whose executives are under investigation.
The construction company Huatong Road & Bridge Group, which narrowly averted what would have been a historic bond default last week, blamed its predicament on a liquidity squeeze following the announcement of a corruption probe into its chief executive.
In normal times, even companies performing below par would not be pushed to the wall by short-term funding difficulties. But these are not normal times. Delayed payment of bills and outright defaults, which have reached levels serious enough to warrant investigation by a five-ministry task force, have been weighing down even healthy balance sheets. Such is the pressure on operating cash flow in many industries that any break in credit lines is the death knell for companies reliant on short-term funding to stay afloat, as we pointed out in a previous post.
Take your pick of probes
The widening of the anti-corruption dragnet into the commercial arena is highlighted by the big corporate names in the news this month:
• Ex-SASAC director and one-time chairman of PetroChina Jiang Jiemin charged with corruption.
• The chief executive of the construction company Huatong Road & Bridge Group (which narrowly averted what would have been a historical bond default last week) “assisting” with corruption investigations.
• The conglomerate Haichang and the Rave Sun Group both accused of using public funds intended to help the firms invest in foreign high-tech companies to buy French vineyards
And still ongoing are the headline-grabbing investigations into executives at the British drugmaker GlaxoSmithKline and Roche Holdings, and the high-profile probes into executives at the state-run oil company China National Petroleum Corp (CNPC). Even Fudan University, in Shanghai, was named and shamed for misuse of research funds.
With the anti-corruption drive gaining momentum rather than fizzing out as it has in the past, nobody who is anybody would want to be seen doing much of anything these days. No action will be seen as the best action, with all that it implies for business growth.
-- Edited by Kevin McIndoe
Pauline Loong is managing director of Asia-analytica Research and Senior Fellow of the CIMB ASEAN Research Institute
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