Wednesday, January 4, 2012

Diary: How China works

Saw this interesting post over on ADVFN's GNG thread:
In China, under the Communist system, nobody paid for anything, debts were just passed on to others and passed around and payment was made in all sorts of weird and wonderful ways, or it was not made the State took the hit bailing out the firm by writing of their debts.

This is the system before what we have today, but the way things work today is very similar to the way it was.

Nobody wants to pay, everyone wants payment deferred for a year, or two, or five.

It all works on the principle that if you do not let me not pay for a long time, I will not order anything from you again, and also not pay for a long time.

Therefore, its better to accept more work, and run up larger debts, as you then have more business - but you have to take the hit on the cash.

This is rampant all over China - one of the many pitfalls of Chinese companies which people outside of China or who have no experience with China cannot understand. And most of these long term debts get rolled into bigger and longer long term debts.

Its very easy to see when its happening, its when companies keep raiding the banks, or their shareholders, for more cash - when in fact, they should not be.

Sounds like a recipe for disaster.

No comments: