With a global recession looming, will cash-rich corporations swoop to the rescue?

Central banks and governments are stretched to the limit while big businesses sit on cash mountains that dwarf national economies. In a downturn, they can make investments and retain staff to shore up consumption and the economy. But will they do it?

Anthony Rowley

Published: 3:00am, 23 Sep 2019

Why you can trust SCMP

If and when economic recession comes, there will be few places to hide. Monetary policy has been stretched to near its limits already (unless you are a modern monetary theorist) while governments are too highly borrowed to finance a bailout. But could the corporate sector act as a kind of deus ex machina?

The idea that big business corporations might emulate the “gods from the wings” of ancient Greek and Roman drama, and offer salvation when all seems lost, may seem far-fetched. And yet many of them are so stuffed with cash that they have the means (if not yet the will) to mount such a rescue.

We are talking sums that make government fiscal reserves look puny in comparison. Nowhere is this more true than in Japan where corporate cash balances easily outpace the size of Japan’s gross domestic product. They are very big too in the United States and in Europe – Britain especially.

Why would companies distribute the cash mountains they have built from restraining wage growth, cutting capital investment and other Scrooge-like behaviours? It could be a matter of enlightened self-interest to prevent the global economy from imploding.

Cash-rich corporates have the financial wherewithal to cushion against an economic recession by making capital investments at historically low interest rates, raising their productivity and their (domestic and international) competitiveness in the process.

They can act as a buffer against recession by retaining employees whose redundancy would otherwise put a drag on consumption, adding to recessionary and deflationary pressures. The business environment may not be ideal for investment and hiring, but it will spiral downwards unless someone takes a stand.

It can be argued that business owes such moves to society and to the economies in which they operate. Firms have enjoyed an environment which has enabled them to accumulate huge cash reserves, partly by restraining wages (which have widely stagnated relative to sales, profits and GDP).

A sense of corporate responsibility (or guilt) may be creeping in. Last month, the American Business Roundtable (headed by Jamie Dimon and which speaks on behalf of 180 US chief executives) urged boards to substitute “stakeholder” primacy for shareholder primacy in the conduct of business.

A capitalist society has to adapt and change with times

And, BlackRock group chief executive Larry Fink made headlines in a statement last year to corporate CEOs by suggesting that society expects companies to serve a social purpose.

Instead of going into higher wages, which tend to boost personal consumption and the economy, surging corporate cashflows have, in the main, been spent instead on share buy-backs, which potentially boost dividends for controlling shareholders but also reduce a company's capital.

This increases earnings for remaining shareholders and strengthens their corporate control. But aside from reducing a company's market capitalisation, it has the effect of eroding the amount of funds that could otherwise be applied to investment in fixed assets – or to paying higher wages.

Wages have been declining relative to corporate sales and profits, and to GDP in the US and other countries in recent years. As The New York Times put it in August last year, “corporate profits have rarely swept up a bigger share of the nation's wealth, and workers have rarely shared a smaller one”.

US firms funnelled record amounts of cash into stock buy-backs, dividends, capital spending and acquisitions last year. As a result, US corporate cash holdings fell to a three-year low of US$1.7 trillion last year, according to a report from Moody’s Investors Service.

The report found that share repurchases, net of stock issuance, nearly doubled last year to a record US$467 billion, driven by strong cash generation and supported by a US tax overhaul.

What the world can learn from China on wage growth

Meanwhile, Japan is extremely rich, said veteran Japan analyst Jesper Koll. Japanese companies own cash in excess of the total capitalisation of the Tokyo Stock Exchange and this, according to Koll, shows that no one is doing a good job: not politicians, employees, shareholders or asset owners.

“In America, investors are much more effective in demanding higher capital returns than their Japanese counterparts; and in Germany, labour consistently succeeds in keeping corporate excess cash reserves as low as possible by demanding the best pay packages in the world,” said Koll.

At the beginning of this year, a steel plant in Nanchang city in China’s Jiangxi province reportedly distributed cash bonuses to employees in a unique way. It built a cash mountain with over 300 million yuan (US$42 million) in banknotes to show the amount being paid out. Others should maybe take note.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

Post