In Hong Kong last week I picked up a copy of the Asian Wall Street Journal and came across a story of complete delusion in the State owned corporate sector.

Apparently state owned Zoomlion makes construction equipment, half of it “concrete equipment”. In 2013 sales fell 20%. That isn’t great, but it’s hardly a news story.

The WSJ dug deeper for the real news story.
Zoomlion ended the year with its receivables of 47,800 million yuan equal to 124% of 2013 revenue. Net cash it earned from operations almost evaporated to just 43 million yuan ($6.9m) in 2013, down from 2,600 million yuan the prior year!

Selling equipment without being paid is not a great formula for success. Taking it to this extreme is simply extraordinary … and requires a very “friendly”, or more likely deluded, bank.

From here the story gets even more confusing. Zoomlion reports that it sells (some of) it’s receivables to banks (factoring in our parlance) without recourse. So it gets cash to fund its expenses, and the bank gets to collect the debt from Zoomlion’s customer.

But it seems that hasn’t entirely worked out either. The concept of non-recourse seems now to have been binned. The banks have repossessed equipment from defaulting customers and in turn Zoomlion has been forced to buy back 673 million yuan worth of equipment from the banks. What a shambles!

Worse, the WSJ points out that Zoomlion has factored 30,100 million of its debts over the last two years, and there is way of knowing what portion of the bad stuff in that has been identified in the 673 million already reversed.

This catastrophic debt picture causes the WSJ to conclude: “Zoomlion’s receivables should make investors cautious. With China’s economy slowing and cracks in China’s property sector widening, customer payments could prove elusive.”

Cautious? What complete rubbish.

This, on the face of it, is a story of a completely and hopelessly deluded and bankrupt company selling equipment to bankrupt customers, and propped up by a completely deluded bank. In any western economy, the collapse of this circus would have occurred long ago. It would have taken out Zoomlion, many of its customers, maybe even it’s bank.

The intriguing questions are: how many stories are there like this in China? and how long can the Government keep this music playing?

Keep watching … the show will be spectacular.