DBS Digital Treasurer Index

“This also helped China’s exports, as demand flocked to China when many of the multinationals had supply chain constraints,” the team member added.

However, as corporates entered into 2021, global economies began to recover from the pandemic and demand shifted back to local markets. JP Morgan’s equivalent report of S&P 1500 companies, which published in July, showed that WCI fell by 11.2 points for US-listed firms in 2021, as it had done for Chinese firms half a year earlier.

In contrast, 2021 saw China enter a “normalisation” period following slower-than-expected demand recovery, a fall-back in appetite for exports, and subsiding fiscal support. As a result, the Chinese corporate WCI in general rose back up by 4.3 points from the low levels it enjoyed at the end of 2020.

Cash levels and conversion cycles

The report also highlighted discrepancies between the cash levels and conversion cycles of US and Chinese corporates.

JP Morgan’s research found that, compared to US multinationals, Chinese companies usually keep significantly higher cash levels on balance sheet – around 16% more. Chinese corporates also tend to have longer cash conversion cycles (CCC) due to longer collection periods and higher inventory levels.

The report further revealed that Chinese corporates’ CCC increased during 2021, after a five-year-long downward trend.

The semiconductor industry saw the biggest increase in CCC, which the report attributed to inventory build-up in 2021 – the result of ongoing geopolitical tensions interrupting operations.

“In 2021, the number came back just as the WCI, under the overall ‘normalisation’ process,” the JP Morgan spokesperson said. However, the team believes that CCC for Chinese firms will continue to fall overall, as the recent increase is smaller than the earlier decreases.

Days payable outstanding (the number of days from the time a company procures raw materials until it pays its suppliers; DPO) and days sales outstanding (the number of days a business takes to collect cash from customers; DSO) are both significantly longer for Chinese listed companies than their US counterparts. The report explained this as being due to differing operating environments and payments and collections practices in both regions.

Unlocking opportunity

Despite overall improvements, there remains a huge potential for Chinese companies to optimise their operational efficiency and release working capital, the spokesperson said.

JP Morgan estimates that $335 billion in working capital could have been unlocked if every organisation in the report had improved related processes as of year-end 2021.

“This is where transformation of treasury management infrastructure and digitisation could play a crucial role.”

The treasury management teams of Chinese companies should look to a more centralised and comprehensive set of strategies to map out key areas of opportunity and seek to leverage advanced treasury management solutions to improve processes across business cycles, the team concluded.

The latest WCI report constitutes JP Morgan’s inaugural edition focussed on 700 Chinese corporates listed on the China Securities Index CSI 800, S&P US China 50, and the Hang Seng China Enterprises Index (HSCEI). Looking ahead, the bank plans to publish this version of the report annually.