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No Quick Fix for Chinese Inventory Stockpiles
By DONNY KWOK | REUTERS
Published: August 27, 2012

HONG KONG — Dah Chong Hong Holdings, a Chinese car dealer, has amassed so much inventory this year that it would take 63 days to sell all of its Bentleys, Isuzus and Toyotas, up from the 42 days’ supply it carried in December.

For Shanghai Jinfeng Wine, a maker of rice wine, a 14 percent increase in inventory plus slowing demand means it would take 22 months to clear stockpiles at the current pace of sales, compared with nine months at the end of last year, Thomson Reuters data show.

As China’s economic growth cooled to a three-year low in the three months that ended in June, inventories have swelled at consumer businesses like car dealers, food makers, liquor companies and department stores, according to a Reuters analysis of balance sheets from 350 Chinese companies.

The bloated inventories complicate Beijing’s efforts to shore up growth as it prepares for a once-a-decade leadership change this year. If China pours in more stimulus money when demand is weak, it could just make the surplus worse by encouraging companies to produce more goods than the market can digest.

About one in three consumer companies recorded inventory growth of at least 10 percent between December 2011 and June 2012. Dah Chong Hong’s jump of $296.5 million in inventory was the largest among the companies examined.

With demand slowing — Chinese retail sales growth eased to a 17-month low in July — it will take longer to clear out the goods.

“To resolve the inventory problems may have to take two to three years to see the results, and it’s impossible to see a major effect within a couple of months,” Kim Jin-goon, executive vice chairman of Li Ning, a maker of athletic apparel, said last week as his company predicted a full-year loss because of inventory backlogs and marketing costs.

These consumer companies primarily feed China’s domestic economy, which must pick up some of the slack from sluggish exports to keep the country on track to meet its 2012 growth target of 7.5 percent. Second-quarter growth slowed to 7.6 percent, and early indicators of July and August point to a lackluster third quarter.

A Chinese manufacturing survey released Thursday showed heavy inventory backups and a sharp decline in new export orders in August.

The Chinese authorities told state-owned companies in July that they should focus on clearing inventories for the rest of the year. That is healthy for long-term growth, but in the short term it curbs demand as companies hold back on ordering new supplies.

It can also squeeze corporate profit margins when firms cut prices to dispose of excess inventory. Profits at nonfinancial state-owned companies fell 13.2 percent year-on-year through the first seven months of 2012, the Ministry of Finance said Aug. 15.

At Dah Chong Hong, inventory rose 38 percent to $1.07 billion between December and June, according to Thomson Reuters data. The company did not immediately respond to multiple requests for comment. In its earnings statement Aug. 15, it acknowledged that margins were getting squeezed.

“Rising inventory levels and price competition have exerted pressure on profit margins and have led to consolidation in the market,” Hui Ying-bun, the company’s chairman, said in the statement.

At Shanghai Jinfeng Wine, a unit of Bright Food, average inventory days — a measure of how long it would take to sell off the stockpile — soared to 678 as of June, up from 284 in December, Thomson Reuters data show.

An official in the chairman’s office who provided only his surname, Mr. Liu, because he was not authorized to speak to the media, said Jinfeng did not consider its inventory level high. Mr. Liu said such stockpiles were necessary to ensure adequate supplies for year-end banquets that are popular in China.

However, in June 2011, Jinfeng held 493 days’ worth of inventory. Its current tally of 678 days is the highest in Thomson Reuters data as far back as September 2007.

The net value of inventory on the books of all 350 companies sampled rose 2.3 percent between December 2011 and June 2012. It was up 6 percent among companies listed on the Shenzhen stock exchange, but down about 4 percent for Hong Kong-listed firms.

The better performance for Hong Kong-traded stocks was primarily because of a $472 million inventory drop at one company: Weiqiao Textile, China’s largest cotton textile firm. Weiqiao curbed production of yarn, fabric and denim “to lower the output with a view to reduce inventory levels,” according to an earnings statement.

China’s textile exports rose just 1.3 percent in the first half of 2012, a drop from the 28.8 percent jump it recorded in the same period of 2011, Weiqiao said.