A Primer on the Financial Policies of Chinese Firms: A Multi‐country Comparison |
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| Authors: | Marc Zenner Peter McInnes Ram Chivukula Phu Le |
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| Institution: | 1. MARC ZENNER is the co‐head of J.P. Morgan's Corporate Finance Advisory. Prior to joining JP Morgan in 2007, Marc was Global Head of the Financial Strategy Group at Citi. Prior to his career in investment banking, Marc was the Chairman of the Finance and Economics Area and a Professor of Finance at The University of North Carolina's Kenan‐Flagler Business School (in Chapel Hill) (from 1989 to 2000).;2. PETER SEAN MCINNES is the Asia Pacific head of J.P. Morgan's Corporate Finance Advisory team based in Hong Kong. Prior to joining Corporate Finance Advisory in 2015, Peter spent 14 years as the head of J.P. Morgan Australia's Structured Solutions group based out of Sydney. Prior to his career in investment banking, Peter spent 10 years as a fund manager focused on fixed income, convertibles and exotic derivatives. Peter holds a Bachelor of Commerce from the University of New South Wales.;3. RAM CHIVUKULA joined J.P. Morgan's Corporate Finance Advisory team after completing his doctoral studies in 2013. Prior to his graduate studies, Ram worked in securitization and structured finance. Ram holds a PhD and MBA in Finance from The University of Chicago Booth School of Business and a BS in Applied Mathematics & Statistics from The Johns Hopkins University.;4. PHU LE joined J.P. Morgan's Asia Pacific Corporate Finance Advisory team based in Hong Kong in 2015. Prior to joining Corporate Finance Advisory, Phu was part of the Derivatives Product team in J.P. Morgan's Private Banking business. Phu holds a BS in Business Administration and MS in Financial Economics from Boston University and an MBA from IE Business School in Madrid. |
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| Abstract: | Chinese companies have grown rapidly over the past few decades, and become increasingly global in the process. In the past five years, the aggregate market capitalization of public companies in China increased more than ten‐fold and their revenue from outside China grew 60%. Nevertheless, Chinese companies have financial policies that are notably different from those of their global counterparts in North America and Europe, and that difference could end up limiting their future profitability and growth. In this report, J.P. Morgan's Corporate Finance Advisory team compares the capital structures of large Chinese companies to those of the largest companies in the U.S., the U.K. and Germany. Among the most important findings, Chinese companies have materially more leverage, much greater reliance on bank loans than bonds, and maturities that are almost 80% shorter than those of typical U.S. companies. To bring their balance sheets in line with those of their global peers, Chinese companies are likely to have to raise over 5 trillion yuan (over $750 billion) in equity while also issuing roughly the same amount in bonds. At the same time, in order to attract that capital on economic terms, they will likely need to find ways to increase the profitability of their businesses, whose return on equity is well below international standards. As the authors point out in closing, making such significant changes in financial and operating policies could be challenging for all stakeholders, and cause some potential dislocation in the short run. But however disruptive, such changes are most likely to ensure the ability of Chinese companies to create the most value in the long run. |
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